Corporate Earnings/Lower Yields Help, But Evidence of Slower Growth Needed

The stock market is likely to be buoyed by favorable corporate earnings reports and lower longer-term Treasury yields this week -- as long as the Israeli/Hamas war doesn't spread.  So far, most reported earnings have beaten expectations.  Flight-to-safety related to the Mideast crisis and softer US economic data should be behind the latter.  

The predominant macroeconomic question overhanging the markets is whether US economic growth will slow enough to bring inflation down to the Fed's 2% target.  Evidence of a slowdown is particularly important after the high September CPI.  The bulk of this week's US economic data are expected to point in this direction. 

September Retail Sales are seen slowing to 0.2-0.3% m/m from +0.6% in August.  What will be important is whether Ex Auto/Ex Gasoline Sales print at or below August's modest 0.2% increase.  They averaged 0.4% m/m so far this year.

September Industrial Production (IP) is expected to dip 0.1% m/m.  A weak print could reflect automotive plant shutdowns stemming from the strike.  This would be a temporary restraint on economic growth, followed by a bounce-back when the strike ends.  The September FOMC Minutes show that Fed staff lowered its forecast of Q423 Real GDP to reflect the strike, but raised its GDP forecast for Q124 to capture a strike-ending bounce-back in production.  The IP Report's data on manufacturing output excluding motor vehicles may be more indicative of the underlying pace of this sector.  The recent trend has been soft, with Mfg Output Ex Motor Vehicles averaging -0.1% m/m over the prior 6 months.  But, Mfg Output ex Motor Vehicles jumped 0.6% m/m in August. 

This week's Housing data are expected to be mixed.  Consensus looks for a flat 45 print for the October Housing Market Index.  It sees September Housing Starts up, but Permits down.  Starts have been volatile in recent months, so it will be difficult to discern a trend in them.  Permits have been trending up, so a decline would have to be sharp to be significant.  

Perhaps the most important data this week will be Unemployment Claims, which provide the broadest high-frequency measure of economic activity.  The latest data are consistent with a slowdown in job growth in October.  But, it is still too soon to be sure.  The consensus expectation of higher prints for Initial and Continuing this week would move in the right direction for this prediction.