The stock market contended with hawkish Fedspeak last week and quickly dismissed it for now. The market was encouraged by evidence of modest economic growth -- not recession -- and contained inflation. This week's US economic data are expected to signal the same. So, the market may very well see further gains after possibly unwinding some quarter-end window dressing that lifted it on Friday.
Consensus looks for the June Employment Report to show a slowdown in Nonfarm Payrolls, a downtick in the Unemployment Rate and moderate 0.3% m/m increase in wage inflation. Payrolls are seen rising 223k m/m, after climbing 339k in May. A slowdown would be consistent with the implications of the Unemployment Claims data. But, the consensus estimate, as well as the Claims data, suggest that job growth still is too high from the Fed's perspective. A sub-100k jobs increase would be consistent with an easing in labor market conditions to the Fed's liking. Moreover, the consensus estimate of a dip in the Unemployment Rate to 3.6% from 3.7% is in the wrong direction for the Fed. Fed Chair Powell said last week that the motivating factor behind current Fed tightening is the very tight labor market.
Powell's comment is another way of saying that the problem for the Fed is not the pace of economic growth, but the level of economic activity. The level of demand is too high relative to potential supply. The Fed would like to solve the problem by having economic growth stay below its longer-term trend, thereby allowing population and productivity growth to lift potential supply. An alternative and faster solution would be for the Fed to tighten enough to precipitate a recession -- thereby knocking demand down to or below potential supply. So far, the Fed has not opted for this alternative solution -- hinted by Powell's reiteration of the Fed's dual mandate of full employment and low inflation. The risk, however, is that the Fed may become frustrated with the slow progress against inflation and resume aggressive tightening. This happened in 1994, when Greenspan abandoned a measured approach to tightening and opted for surprise jumps in the funds rate target. At the minimum, Fed rhetoric has to stay hawkish (which should be seen in this week's release of the June FOMC Minutes) to counter the inherent dynamism of the US economy. Economic growth would probably accelerate if the Fed eased off the brake.
A sustained slowdown in core inflation could mollify the Fed. And, a deceleration in core inflation to 0.2% m/m is not out of the question. Housing rent would probably need to slow sharply from the recent +0.5% pace for this to happen. It remains to be seen.
Consensus estimates of this week's other key US economic data should be market friendly. Consensus expects an uptick in the Mfg ISM to 47.0 in June from 46.9 in May. Despite the expected increase, this level would remain in recession territory and not scare the Fed. While the evidence is mixed, it is tilted toward supporting the consensus estimate.
Consensus also looks for a decline in Job Openings to 9.9 Mn after the surprising increase to 10.1 Mn in April. A decline would signal an easing in excess demand for labor, but excess demand would remain with Job Openings still exceeding the 7.5 Mn pre-pandemic level. A consensus-like print would not persuade the Fed to end its tightening path.
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