The stock market will likely be held down this week by fears of the September CPI (due Thursday), September FOMC Minutes, and upcoming Q322 corporate earnings. But, the risks are that the consensus estimate of the CPI is too high and corporate earnings may be better than expected.
Consensus looks for +0.2% m/m Total and +0.5% Core CPI in September. But, some components may surprise to the downside. Airfares could fall sharply, after not falling as much as anecdotal evidence suggested in August. Also, some survey data suggest the CPI's measures of housing rent could slip. High inventories, lower oil prices, and the strong dollar could exert downward pressure on a number of items, as well.
Consensus looks for a sharp slowdown in Corporate Earnings to 3.1% (y/y) in Q322 from the big gains in the prior two quarters (9.6% and 11.6%, respectively). The macro evidence supports the idea of a slowdown (see table below). But, not all evidence is negative, so earnings may surprise to the upside. Profits from oil should weaken, as oil prices fell. A strong dollar and slower economic activity outside of the US should hurt earnings from abroad. But, US economic growth looks like it could have sped up on a y/y basis. And, profit margins may have held up -- besides prices having risen by more than wages, prices sped up while wages slowed.
The September Employment Report was not as bad regarding Fed policy as the markets made it out to be. While the decline in the Unemployment Rate to 3.5% shows the labor market remained tight, wage inflation was subdued. It raised the possibility that the Unemployment Rate might not have to rise as much as thought to hold down wage inflation. The Q322 Employment Cost Index (due October 28) conceivably could provide some confirmation. And, while the +263k m/m increase in Nonfarm Payrolls was well above the +100k pace needed to keep the Unemployment Rate steady, their slowdown was in the right direction. The latest Unemployment Insurance Claims suggest a further slowdown in October.
At this point, a 75 BP hike at the November 1-2 FOMC Meeting seems to be a near-certainty, but the evidence does not guarantee Powell's threat of more aggressive tightening beyond the FOMC Central Tendency forecast of measured hikes terminating at 4.6% in 2023. The September FOMC Minutes will probably emphasize this forecast.
A lot of news commentary is citing the still high 5% y/y increase in Average Hourly Earnings to argue that inflation is not falling fast enough. But, this is a backward looking way to measure wage inflation. The m/m change, +0.3% in both August and Sept, is a more current measure. The 0.3% pace (3.7% annualized), in fact, is consistent with the Fed's 2% inflation target once productivity is taken into account.
Macroeconomic Evidence Regarding Corporate Earnings
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q119 3.2 -12.8 +7.9
3.2 2.1 51.9
Q219 2.7
-12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
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