A Benign FOMC Meeting Should Support Stocks

The stock market rally should continue through this week's FOMC Meeting, which should issue a Statement not much different from prior ones.  The Statement should imply that the Fed is not ready yet to begin stepping on the brakes or even hint they will soon do so.  Following the meeting, stocks are likely to move up into month-/quarter-end, particularly since the subsequent Q221 corporate earnings season should be strong.  This week's US economic data are expected to show gains, thereby supporting the stock market rally.

There are two reasons why the Fed is likely to keep its easy money policy now.  First, labor market slack remains well above pre-pandemic levels.  The Fed has indicated elimination of this gap is one of their goals.  Second, much of the price surge seen in the April and May CPI's can be attributed to temporary post-pandemic adjustments, in line with the Fed's view of near-term inflation.  The dip in the University of Michigan 5-Year Inflation Expectations to 2.8% in mid June from 3.0% in May should have been a relief to Fed officials, as it suggests longer-run inflation expectations are contained.   The measure is back to the top of its recent 2.3-2.8% range.

Last week's drop in longer-term Treasury yields despite the high CPI also should alleviate concern officials might have regarding inflation expectations.  To be sure, it is conceivable the inability of President Biden and Republicans to agree on an infrastructure bill was behind the drop in yields (as well as the increase in stocks).  It meant the markets -- both Treasuries and stocks -- do not have to move in ways to crowd out other spending ahead.  It remains to be seen whether the latest $1 Tn bipartisan Senate deal gains traction.  

This week's US economic data are expected to post modest gains.  These include May Ex Auto Retail Sales, Industrial Production and Housing Starts.  Such prints would support the stock market rally without upsetting the Treasury market.  A high May PPI print is likely to be discounted, as was the CPI.  And, it would be a market positive if it printed below the 0.6% m/m consensus (for both Total and Core).  

The most interesting release could be Unemployment Benefit Claims.  Last week's report showed that Continuing Claims finally fell sharply.  This week's report will provide evidence whether the sharp decline was the start of a downward trend.  The ending of supplemental benefits in some states could have pushed unemployed people to get jobs.  If so, it would bode well for June Payrolls.