Bracing for the Fed

The stock market will likely trade cautiously ahead of the Kansas City Fed's Jackson Hole Conference on August 26-28.  The Fed Chair's speech at this annual conference sometimes announces intentions to change monetary policy.  So, the markets will probably brace for an announcement about an intention to taper in the near term.  They will be looking for hints to this effect in this Wednesday's release of the July FOMC Meeting Minutes -- although they are not likely to find much, given that Fed Chair Powell's post-meeting conference did not provide any new insights.  In the background, concern about the negative effects of the Delta virus variant could weigh on stocks.  But, this concern should be mitigated if upcoming US economic data continue to point to strong growth.

This week's US economic data releases will touch on the consumer, manufacturing and construction sectors.  Consensus looks for -0.3% m/m Total and +0.2% Ex Auto Retail Sales for July.  A small decline or increase is typical after a strong Sales gain as in June (+0.6%Total, +1.3% Ex Auto).  So, any commentary attributing a soft print to the virus should be viewed dubiously.  The July Employment Report showed job gains in most Retail categories, suggesting Retail Sales remain in an uptrend.  

Consensus looks for a +0.5% m/m increase in July Industrial Production and, within it, Manufacturing Output.  The risk is for an even larger gain in the latter, as the consensus estimate does not appear to take account of a productivity gain this month -- the expected Output increase equals the increase in Total Hours Worked in manufacturing.  What could be important for the stock market if this report suggests the chip shortage is ending in the motor vehicle sector.  The clue will be whether Motor Vehicle Assemblies increase m/m.

Consensus expects a dip in July Housing Starts but an increase in Permits.  A dip in Starts could be just a lagged reflection of the decline in Permits in June.  So, if Permits rebound in July, the decline in Starts should be dismissed as temporary. That said, the housing sector has a problem.  The Affordability Index (based in part on Existing Home Prices) has been declining all year because of the surge in home prices.  Since March, the Index has dropped to its lowest  level since 2018 despite the benefit of lower mortgage rates.  The risk is for a shift to rentals from 1-Family purchases, which could hurt construction activity.  Higher rents will eventually show up in the CPI, while home prices could soon be coming down.