Stock Market Stabilization This Week?

The stock market has a chance to stabilize this week, although this will likely require highly favorable prints for key US economic data.  With the Fed likely keeping rates steady and repeating its "wait and see" stance at this week's FOMC Meeting, the markets have become the vigilantes to make sure the Fed's goal of 2% inflation is achieved.  The strong September data underscored that the path to 2% inflation will not be a straight line and that more restraint from the markets may be needed.  Evidence of an easier labor market and benign wage inflation in this week's US economic data, thus, could provide some relief.  

Curiously, the election of a conservative Congressman as House Speaker could turn out to be a market positive.  While a government shutdown in mid November is a risk, the budget outcome could be a market positive if the Republicans succeed in blocking the Democrats' social spending proposals.  The long end of the Treasury curve could rally somewhat if fiscal restraint is seen.  This rally, in turn, would help stocks.

The Israel-Hamas war also seems to be moving to the background for the markets.  While the anti-Israel rhetoric has been loud, the war so far does not appear to be spreading significantly.

Consensus estimates of this week's key US economic data are market friendly, but may not be friendly enough.  Payrolls are seen slowing to a sub-200k gain, the Unemployment Rate steady at 3.8%, and Average Hourly Earnings rising  a moderate 0.3% m/m (although higher than the 0.2% September increase).   To be sure, the consensus Payrolls estimate excluding strikers (30k) is +218k.   Private Payrolls are seen at +145k and +175k ex strikers.  It's not clear whether this will be enough to placate the markets if Total Ex Strikers exceeds 200k.  The Claims data support the idea of a slowdown in Payrolls without the strikers and hint at an increase in the Unemployment Rate.  

The other Report that sheds light on the labor market will be the August JOLTS data.   Consensus sees Job Openings falling to 9.2 Mn from 9.61 Mn in July.  They would remain well above the 7.5 Mn pre-pandemic trend.  However, the market may be overstating its significance as a measure of excess labor demand.  Conceivably, companies may be keeping posted job openings but becoming cautious about filling them, concerned about an impending economic slowdown.  In this case, the level of Job Openings overstates labor demand.

This week's data will include all three major measures of labor costs -- October Average Hourly Earnings (AHE), Q322 Employment Cost Index (ECI), and Q322 Compensation/Hour.   All three may need to print low to appease the markets.  There is no evidence for AHE.  But, the evidence for the ECI suggests the consensus estimate of 1.0% q/q (the same pace as in Q223) is too high.  Average Hourly Earnings slowed to 0.8% in Q323 from 1.2% in Q223.  Consensus looks for Compensation/Hour to slow to 4.8% (q/q, saar) from 5.7% in Q223.  Partial evidence suggests the consensus estimate is too high, as well.  Even if not, a surge in Productivity is seen to continue to dampen the inflationary impact.  Unit Labor Costs are expected to slow to 0.8% from 2.2% in Q223.