Developments in Washington may soon create a hurdle for the market. Neither the bi-partisan infrastructure proposal nor Biden's so-called infrastructure proposal is the issue. It is still not clear that either will pass. And, if they do, the specifics of the associated tax hikes and spending path are needed to tell whether the markets need to tighten or not in the near term as an offset. The more immediate issue is whether a hike in the debt ceiling will be passed without a problem, with August 2 being the deadline. Will passage happen seamlessly or be delayed, the latter forcing the Treasury to implement "extraordinary measures" to finance the government? A delay would risk a US dollar downgrade, which would be a negative for the stock market.
While the ceiling will be hiked eventually, the amount bears on whether the infrastructure proposals are made into law. A large hike could be needed if the increased spending is not sufficiently offset by higher taxes. Republicans would likely be highly reluctant to vote for a large hike, knowing it would effectively ratify the proposals. So, a vote on the debt ceiling risks being a last-minute affair. And, the likely outcome will be a small hike for a short period, thereby kicking the issue down the road -- possibly until the specifics of the proposals are known. This result should solve the immediate problem for the stock market. But, if it is not achieved before the August 2 deadline, stocks could sell off sharply, albeit temporarily.
Away from developments in Washington, strong corporate earnings reports and US economic data should continue to support the stock market. This week's economic data are expected to post good-sized gains, although there is downside risk to some of the less important ones.
Consensus looks for a 3.5% m/m rebound in June New Home Sales, but the risk is for a decline -- as was the case with June Housing Permits. Consensus sees an increase in June Durable Goods Orders, +2.1% m/m Total and +0.8% Ex Transportation. But, chip shortages and more subdued prices could hold down the gain.
More importantly, consensus expects an even larger speedup in Q221 Real GDP Growth than does the Atlanta Fed model -- +8.6% (q/q, saar) versus +7.6%. (Real GDP Growth was 6.4% in Q121.) And, consensus sees Initial Claims reversing last week's reported jump. If they do, it would signal that above-trend growth continues in Q321.
On Friday, consensus looks for a 0.7% m/m jump in June Consumer Spending. Spending strength was already seen in the Retail Sales data, but a jump in this broader measure should bolster confidence in the consumer sustaining strong growth ahead. The June PCE Deflator is expected to be high, as well, with the Core up 0.6% m/m. A high inflation print was already seen in the June CPI. Consensus looks for a large 0.9% q/q increase in the Q221 Employment Cost Index, matching the prior quarter's jump. It is too soon to be concerned about a sustained speedup in labor costs, however. Large wage increases could be just temporary adjustments to the economy's re-opening. It will become a problem regarding inflation if higher wage inflation persists in H221.
This week's FOMC Meeting should not be a problem for the stock market. The Statement and Fed Chair Powell's post-meeting comments will likely underscore the intent to keep monetary policy aimed at promoting economic growth and the belief that the recent jump in inflation is temporary. The drop in longer-term Treasury yields since the last meeting supports these ideas.
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