Stocks Buffeted By Opposing Messages

The stock market will likely continue to be buffeted by opposing messages emanating from US economic data and Fed official comments.  The data have been Fed-friendly for the most part.  They show a slowing in economic growth, but not necessarily a prelude to recession.  Core inflation continues to be contained and not far from the Fed's 2% target.  Longer-term inflation expectations so far are contained, as well, and commodity prices are mostly off their highs.  But, Fed officials' comments remain hawkish for the most part, maintaining a threat of aggressive tightening if the trend in inflation does not move down.  The threat could appear in this week's release of the June FOMC Minutes. However, the Minutes may be overly hawkish since the softer data were released after the Meeting.  A better read of the Fed leadership's views might be NY Fed President Williams' speeches this week.

This week's June Employment Report is expected to sustain the message of recent economic data -- a slowdown with contained wage inflation.  Consensus looks for Payrolls to increase +270k m/m, less than the +390k in May.  Evidence from the Claims and other data support the idea of slower job growth this month.  But, the consensus estimate is still above the pace that is consistent with a steady Unemployment Rate.  So, there is the risk that the consensus estimate of a steady 3.6% Unemployment Rate is too high -- unless Payrolls come in below consensus or Labor Force Participation increases.  Consensus also expects Average Hourly Earnings (AHE) to rise 0.3% m/m, the same as the trend seen since February. 

A near-consensus June Employment Report would argue for a 50 BP rate hike at the July FOMC Meeting.  Fed officials would presumably be happy with a slowdown in job growth.  Officials also should be happy with a 0.3% AHE.  This pace is consistent with the Fed's 2% price inflation target, taking account of productivity growth.  A steady Unemployment Rate, however, would probably be seen as too low.  Some Fed officials have said they would like the Unemployment Rate to climb eventually to 4.5-5.0% to hold down wage inflation.  But, with job growth slowing, they could be satisfied that the Rate will likely move up ahead.

Perhaps just as important as the Employment Report will be May Job Openings and Quits data contained in the JOLTS report.  The Fed views total demand for labor as Employment Plus Job Openings.  Powell has said that he hopes the easing in labor market conditions will be realized through a decline in Job Openings rather than a reduction in employment.  Interestingly, the June Mfg ISM Report said that manufacturers are seeing fewer Quits than in recent months, suggesting the recently excessive demand for labor is easing -- companies may not have to bid as much to get people to stay at their jobs.  The May JOLTS report could be too soon to show this development, however.