The stock market may trade cautiously this week, as it faces the possibility of a hawkish FOMC Meeting and key inflation/labor cost data. Moreover, the market soon will be facing the risk of seasonal weakness in August. To be sure, the market may take the FOMC Meeting in stride, as a 25 BP rate hike and threats of at least another hike ahead are well expected. The US economic data, as well as corporate earnings, may be more important. As for the data, consensus expectations are friendly regarding the PCE Deflator but somewhat disappointing regarding the Employment Cost Index. The latter would underscore the likelihood of another Fed rate hike ahead.
Consensus expects the Core PCE Deflator to slow to +0.2% m/m in June from 0.3% in May, the same as what was seen in the Core CPI. The y/y is seen falling to 4.2% from 4.6%. This seems like a reasonable expectation. While it should be welcomed by the Fed, there likely needs to be more months of 0.2% or lower core inflation to convince officials that their fight against inflation has been won. With oil prices up, Ukraine wheat exports on hold, and the dollar softer, the Fed has to remain cautious about the inflation outlook.
The consensus estimate of a 1.2% q/q increase in the Q222 Employment Cost Index (ECI) implies no softening in labor cost inflation. It keeps the pace in its recent range, as did the speedup in Average Hourly Earnings (AHE) in Q22 (see table below). Although the ECI is a broader measure of labor costs than AHE, both have risen by similar amounts in recent quarters -- up about 5.0% (annualized). However, the broadest measure of labor costs -- Compensation/Hour -- has been softer, rising only 3.0% over the year ended in March 2023. This broadest measure does not keep the composition of jobs constant, unlike the ECI. This is often viewed as a drawback. Allowing for compositional shifts, however, may be a better way to understand the impact of labor costs on price inflation if companies are shifting their labor force composition to hold down costs.
The other important data this week will be Unemployment Claims. While Initial Claims fell in the latest week, Continuing Claims rose. As they stand now, Initial show fewer layoffs in July than in June. But, Continuing Claims have risen and suggest a slowdown in July Payrolls. One more week's data are needed to finalize the implication of Continuing for July Payrolls.
(percent change over the quarter)
AHE ECI
Q223 1.1 na
Q123 0.9 1.2
Q422 1.2 1.1
Q322 1.1 1.2
Q22 1.1 1.3
Q122 1.3 1.4
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