Stocks In An Uptrend

The stock market is likely to stay in an uptrend this week, helped by soft inflation data.  Other US economic data are expected to be mixed, but on balance point to modest economic growth in Q423.  The combination of low inflation and modest growth should sustain expectations of steady Fed ahead in the near future.  Powell's speech this week should not disabuse these expectations.  Month-end buying and hope for a "Santa Claus" rally in December could help the stock market this week, as well.

With the Israel/Hamas hostage deal lifting hope that the Middle East will soon return to normalcy, risk premiums in the markets could subside.  However, one of the reduced risk premiums appears to be in a weaker dollar in the FX market.  The latter also could reflect a reduced fear of Fed tightening.  Nevertheless, a weaker dollar could become a problem for the Fed next year.  First, a weaker dollar boosts US exports and import substitution -- helping to lift economic growth.  Second, it boosts import prices and thus inflation.  Right now, the weaker dollar is not a dominant concern in the stock and Treasury markets.  However, it is important to keep an eye out for how it behaves ahead.

The most important US economic data this week is the October PCE Deflator.   Consensus looks for +0.1% m/m Total and +0.2% Core, in line with the soft CPI already reported.  The y/y is expected to fall for both, although staying above 3.0%.  This would be welcome news for the Fed.  But, officials have said one, or even a few, low prints would not be enough to end the tightening policy bias.

Another important data are Unemployment Claims.  They are expected to rebound somewhat after dropping in the prior week.  The latter changed their implications for the November Employment Report, no longer suggesting a further slowdown in Payrolls.  However, seasonal adjustment of the Claims data is not reliable in this holiday season.  So, they may be less useful in providing clues about the monthly jobs data.

Other US economic data are expected to be mixed.  October New Home Sales are expected to dip and Consumer Spending to slow.  An expected decline in the November Conference Board Consumer Confidence Index would underscore a softening consumer, as well.  But, the November Mfg ISM is expected to tick up, although remain sub-50.  And, October Construction Spending is expected to remain in an uptrend, reflecting the recent increase in Housing Starts and strength in non-residential building.