The stock market should trade cautiously this week as it gets through several large corporate earnings releases. Once these releases are digested, the market will face a number of positive macroeconomic factors and some potentially negative ones. Positively, the US economic data should continue to indicate above-trend growth going into Q421, after a Q321 slowdown. And, the Fed is committed to gradual tapering and keeping rates steady until the asset purchases are over (in middle of 2022). Negatively, further increases oil and other commodity prices will not only filter through the various inflation measures but also serve as a tax on the consumer. Also, at some point, the Democratic spending/tax bill could come together and be problematic for stocks. A continuation of the stock market rally over the next few weeks could depend on whether these negative potentials turn out to be less of a problem than feared.
A number of considerations suggest further increases in commodity prices, however. /1/ With US GDP Growth likely to speed up in Q421, demand for commodities is not likely to abate, if not go higher. The additional transfer payments in the Democratic legislation would boost demand, as well. /2/ Increased supply, such as higher oil production, also does not appear to be happening soon. OPEC ministers reaffirmed their quotas at their October 4th meeting and may do the same at the November 4th meeting. The Saudis do not appear to be inclined to bend to US requests for greater oil output, perhaps /a/ because the Biden administration had earlier sanctioned the Saudi Crown Prince over the journalist Kashoggi's murder and /b/ because the administration has moved toward Iran, the Saudi's enemy. Domestically, US frackers apparently are reluctant to increase production, given the administration's anti-oil policy stance. But, if oil prices rise to $90-100/bbl over the next few weeks, OPEC may very well decide to increase production at its early-December meeting.
There are three important US economic data this week -- Q321 Real GDP Growth, the September PCE Deflator and the Q321 Employment Cost Index (ECI). The markets' responses could be muted, however.
Real GDP Growth appears to have slowed sharply in Q321, with fears of the Delta variant apparently keeping consumers from restaurants and other activities. While the chip-shortage drag on motor vehicle production received a lot of press, the q/q decline in vehicle assemblies was modest. Consensus looks for Real GDP Growth of 2.8% (q/q, saar), versus 6.7% in Q221. The Atlanta Fed model is even weaker at +0.5%. However, there are reasons why Real GDP Growth will speed up in Q421. The Claims data are falling fast, Retail Sales data show a rebound in consumer spending over August and September, and the impact of the Delta variant appears to be waning. So, the markets may not extrapolate Q321 weakening to Q421 and thus could have a muted reaction to a low print.
Consensus looks for a modest 0.2% m/m increase in the September Core PCE Deflator, versus 0.3% in August. The CPI already has shown inflation to have moderated in the past two months. So, this is old news. In contrast, there is some evidence, such as Used Car Prices and pass-through of higher oil and other commodity prices, that raises the risk of a higher print in October. So, again, the market reaction to a soft September inflation report could be muted.
Consensus expects a speedup in the Q321 ECI to +0.9% (q/q) from +0.7% in Q221. The Q3 increase would match the pace of Q121, so it could be viewed as being in a range and not signaling a significant upsurge in labor costs. The ECI has been rising faster than the +0.4% 2020 average so far this year, but its pace is not far different from the +0.7% average in pre-pandemic 2019. The ECI is important because, among the major measures of labor costs, it is the least affected by compositional shifts.
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