A Summer Rally After A Fed Pause?

A Fed decision to pause in rate hikes at this week's FOMC Meeting may be met by some profit-taking in the stock market, but it will help set the stage for a summer rally.  A pause would signal that the Fed wants to keep the cost of reining in inflation low, allowing the latter to be achieved through slow growth rather than recession.   Moderating inflation along with modest economic growth should be a positive for stocks.  This week's US economic data may very well point to such a combination.  

This week's inflation data risk being on the soft side.  To be sure, consensus looks for a still-high May CPI, with +0.2% m/m Total and +0.4% Core.  But, there is downside risk to both, as I mentioned last week.  Moreover, there is room for a further slowdown in Core in coming months through a slowdown in the CPI's measure of housing rent.  The moderation in labor costs (see last week's blog) and commodity prices, as well as the somewhat stronger dollar (the effect of which could show up in this week's May Import Prices release), bode well for an inflation slowdown ahead, as well.  Consensus also looks for a benign May PPI, with -0.1% m/m Total and +0.2% Core.

This week's real-side data are expected to show slow, but positive growth.  Consensus expects May Retail Sales to dip 0.1% m/m in Total but increase 0.1% Ex Auto, after +0.4% for both in April.  There is some upside risk, reflecting the tendency for sales to recover from a very weak period for several months (sales fell in February and March).  Also, news reports of good mall traffic over the Memorial Day weekend may show up in the figures.  Another report regarding the consumer will be the Mid-June University of Michigan Consumer Sentiment Index.  Consensus sees an uptick to 60.5 from 59.2 in May.  The more important part of the survey will be the 5-Year Inflation Expectations.  The question is whether they  return to their 2.8-3.0% range after rising to 3.1% in May.  A return would assuage fears that longer-run inflation expectations are becoming unhinged.

Consensus also looks for a 0.1% m/m increase in May Industrial Production.  The risk is for Manufacturing Output to edge up, as well, based on Total Hours Worked.  An increase in the latter would put the April-May average about 2.0% (saar) above the Q123 average, raising doubt about the significance of the weak manufacturing surveys seen in recent months.