Stock Rally To Survive This Week's Economic Data and Events?

The stock market rally will probably survive this week's key US economic data if the data print as consensus expects.  And, more market-friendly prints than consensus estimates can't be ruled out.  The November 17 Federal Budget deadline could present a problem, but how it will be resolved remains an open question.  Moody's downgrade of the US may spur some fiscally conservative decisions regarding the budget. If it looks like the Democratic proposal to expand social programs will not pass, the outcome could be a market positive even if the government shuts down for a few days.

Fed Chair Powell scared the markets last week by keeping the possibility of renewed tightening on the table.  He stipulated that the Fed needs to see solid evidence of a downtrend in inflation to end the tightening cycle.  He said this would take more than just a few months of low inflation prints.  From an economist's perspective, what will likely be needed to mollify the Fed is a significant weakening in GDP growth and a large increase in labor market slack.  An overshooting to the downside in economic growth may be needed to establish the conditions for good, non-inflationary economic growth ahead.  An overshoot could be problematic for the stock market at some point.

There already is evidence that economic growth is slowing and the labor market loosening up.  Unemployment Claims have moved up in the past couple of weeks.  If they stay at these levels in the next few weeks, they would point to another slowdown in November Nonfarm Payrolls and possibly a higher Unemployment Rate.  The renewed softening in commodity prices also attests to a slowing economy.  

This week's release of October Retail Sales and Industrial Production are expected to be soft.  Although a slowdown in Retail Sales could be just the typical pause after a strong month and a decline in Industrial Production could reflect in part the auto strike, near-consensus prints may very well be positives for the markets.  They would support the idea that the Fed may get the slowdown it wants.

If signs of a slowdown accumulate, the markets could view still-high inflation data as temporary.   Consensus looks for a benign Total but still-high Core CPI for October.  Total is seen at +0.1% m/m and Core at +0.3% (same as in September).  A 0.2% Total or a 0.2% Core can't be ruled out.  The latter would likely be a big positive for the stock market, while a consensus print for Core could be a small negative.