Stock Rally Should Survive This Week's FOMC Meeting

The stock market rally should survive this week's FOMC Meeting.  The Fed is likely to keep steady policy and retain its message that further tightening is possible if the trends in economic growth and inflation speed up.   Consensus estimates of this week's key US economic data may underscore this message, although a friendlier Core CPI can't be ruled out.

The November Employment Report did not contain evidence that would persuade the Fed to change its stance.  Excluding the direct effects of strikers, Private Payrolls (Total less Government jobs) rose 112k, a bit slower than the 115k increase in October.  Both increases are in line with estimates of job gains that are consistent with trend economic growth.  Although the Household Survey showed jumps in both Civilian Employment and Labor Force, these figures likely reflect the small sample bias of this Survey.  This bias is eliminated in the calculation of the Unemployment Rate.  And, while the Rate fell to 3.7% from 3.9%, it equals the August-September average.  A steady Rate also is consistent with trend-like economic growth.  Total Hours Worked are on track for 1.0-2.0% Real GDP Growth in Q423.  The Atlanta Fed model's latest projection is 1.2%.

Wage inflation was a bit on the high side in November, with Average Hourly Earnings up 0.4% m/m. But rounding made it look worse than what it was.  The unrounded increase is 0.35%.  Also, the one-off UAW settlement may have added a bit to AHE this month.  The 2- and 3-month averages of AHE are both 0.3%, which is consistent with the Fed's 2% inflation target, taking account of productivity growth.  However, it could be disconcerting to the Fed that moderation in wage inflation is not widespread among sectors.  AHE rose 0.3% or less in only about half of the major sectors.  The absence of a widespread acceptable pace of wage gains argues for the Fed to keep a hawkish tilt in its rhetoric.

The Fed's Central Tendencies will be updated at this meeting.  They are likely to show faster Real GDP Growth, lower PCE and Core PCE Deflator inflation, and no change in the Unemployment Rate forecasts than those made in September.  These changes would be stock market friendly.  The Fed's forecast of rate cuts in 2024 and 2025 will probably not change much, if at all.

Consensus estimates for this week's key November US economic data, however, are somewhat unfriendly.  It looks for 0.0% m/m Total (a good print) but +0.3% Core CPI (slightly higher than desired). A 0.2% print for Core can't be ruled out, but it likely would require substantial holiday discounting and a slowdown in Owners' Equivalent Rent.  Heavy discounting may be behind the consensus estimate of -0.1% m/m  for both Total and Ex Auto Retail Sales.  If so, the soft prints would understate the "real" gains in consumption.  Consensus expects a 0.3% m/m increase in Industrial Production, including a 0.5% rebound in Manufacturing Output.  They reflect the end of the UAW strike, so overstate trend.