The stock market may pull back over the next couple of weeks now that a debt ceiling deal has been announced-- on some profit-taking or caution ahead of the June 13-14 FOMC Meeting. If so, there is reason to think the market will resume its rally after the Meeting, regardless of the outcome.
There are three possible outcomes to the Meeting -- /1/ a 25 BP hike, /2/ No hike, and /3/ No hike but said to be just a pause in the tightening path.
/1/ With recent US economic data pointing to continued growth, and this week's key data risking the same, a 25 BP hike may very well be likely. But, it could have little impact on the stock market, being viewed as not large enough to significantly damage the economy. In other words, the economy's momentum could be seen as withstanding modestly higher short-term interest rates.
/2/ If the Fed decides not to hike, perhaps to avoid hurting the banking sector or counting on credit tightening to slow the economy, the market should rally. Such a decision would be pro-growth. Note that an Atlanta Fed survey suggests credit tightening is having little effect on businesses. In contrast, Mortgage Applications might be beginning to be impacted by tighter lending standards.
/3/ A pause but with a promise to resume hiking if needed should be a positive for the market, as the immediate danger is pushed ahead.
Claims for Unemployment Insurance undermine the idea of a worsening economy. Initial Claims have moved down toward the lower end of the range seen since February, suggesting the pace of layoffs has slowed. And, Continuing Claims have turned down, suggesting hiring has picked up. The Claims data highlight the risk of another speedup in May Payrolls -- contrary to the consensus estimate of a slowdown.
The consensus estimates of this week's key US economic data encourage the idea of a pause in Fed tightening. The May Employment Report is expected to show Payrolls slowing to +195k from +253k in April, the Unemployment Rate edging up to 3.5% from 3.4%, and Average Hourly Earnings slowing to +0.3% m/m from +0.5%. These are all still too strong for the Fed, but their m/m moves are in the right direction. Consensus also looks for a dip in the June Mfg ISM to 47.0 from 47.1. Some evidence -- Markit US PMI and lagged Phil Fed Mfg Index -- supports the idea of a decline.
A decline in Job Openings in the April JOLTS Data would lend support for a pause, as the Fed views the figure as a measure of excess demand for labor. A decline is far from certain, however. The question is whether the jump in April Payrolls filled the openings, pushing the latter down. Or, did the Payroll jump signify a ratcheting up in demand for labor, which could show up in an increase in Job Openings, as well.
Recent data point to some divergences among the Q223 GDP components, but on balance add up to moderate growth according to the Atlanta Fed model (1.9% is the latest estimate) -- perhaps enough to handle modestly more Fed tightening. Consumption looks to be moving up, Residential Construction may be flattening out if not turning up, and government purchases (particularly for defense) are strong. In contrast, net exports and inventory investment have turned down. This week's report on April Construction Spending will provide more evidence regarding Residential Construction and also business-related construction activity. The repatriation of manufacturing operations already is showing up in increased construction activity in this sector. Construction of alternative energy infrastructure and EV-related factories also could provide a boost.
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