Macro Evidence Remains Stock Market Friendly

The macroeconomic background should continue to support the stock market this week.  Last week, the June Employment Report pointed to decent economic growth going into Q323.  The risk this week is for the June CPI to show even more of a softening than consensus expects.  The Fed still is likely to hike by 25 BPs at the July 25-26 FOMC Meeting, but that is already built in by the markets.  

The sharp slowdown in June Payrolls to +209k m/m Total and +149k Private is the second of the past three months when job growth -- particularly Private -- moved close to the pace consistent with the Fed's goal.  Nevertheless, the Report bodes well for Q322 economic growth.  Cyclical sectors -- manufacturing and construction -- posted gains.  And, with the Nonfarm Workweek rising, Total Hours Worked jumped in June.  The latter's level is 1.0% (annualized) above the Q222 average -- a good take-off point for Q322.  

Wage inflation may be less of a problem than suggested by the 0.4% m/m increase in Average Hourly Earnings in May and June.  Both rounded up from 0.35% -- so they were "low-side" headlines.  In June, speedups and slowdowns relative to the prior 3-month average were split almost evenly among the sectors.   More than half of the sectors posted wage gains of 0.3% or less.  They are consistent with the Fed's 2% price inflation target, taking account of productivity growth.

The moderate wage inflation may help hold down the June CPI.  Consensus looks for +0.3% m/m for both Total and Core, the latter a slowdown from the +0.4% in April and May.  Unlike in these earlier two months, Used Car Prices should not jump.  Instead, the risk is that they fall, catching up to the declines seen at the wholesale level in the past few months.  Along with the possibility of subdued increases in other components, a below-consensus print for both Total and Core cannot be ruled out.

The June Employment Report provided more reason to be cautious about placing much weight on private surveys.  The slowdown in Payrolls made mockery of the +495k ADP Estimate.  The latter has not been a consistently good predictor of Payrolls.  Total Hours Worked in the Manufacturing Sector point to another increase in Manufacturing Output in the June Industrial Production Report.  Hard data on manufacturing have consistently been stronger than the weakness seen in Mfg ISM and similar surveys in recent months.