Stock Market Rally On

The stock market rally now looks like it can continue well past this week's FOMC meeting.  Inflation may have attained the Fed's 2% target and economic growth looks solid.  The Fed can become patient, remaining market supportive by making rate cuts still a possibility for H224.  Indeed, Fed Chair Powell may continue to argue that "real" interest rates may become too restrictive as a result of the slower inflation.  With a patient Fed in the background, stocks may take the January Employment Report in stride, particularly if, as the latest evidence suggests, job growth slowed. 

The December Personal Income Report had good news for both the inflation and economic growth outlooks.  PCE Deflators were even lower than their 0.2% m/m  headlines.  Total and Core each rose 0.17% unrounded or up 2.0% annualized.   And, Real Consumption in December was 2.0% (annualized) above the Q423 average -- a strong take-off point for Q124.  Consumption should continue at a good pace in Q124, even if there is some pullback in one or two months as is typically the case after a strong month.

The latest Unemployment Claims data, which include the Payroll Survey Week for Continuing Claims, now support the consensus expectation of a slowdown in January Nonfarm Payrolls.  Consensus looks for Payrolls to slow to +178k from +216k in December.  It also looks for an uptick in the Unemployment Rate to 3.8% from 3.7% and for Average Hourly Earnings (AHE) to slow to 0.3% m/m from 0.4%.  These would be market friendly prints.  Unfortunately, there is no reliable evidence for them. 

The consensus Payroll estimate is likely still too high from the Fed's perspective.   Job growth of 100k or less per month would be more consistent with creating slack in the labor market.  However, this month's Payrolls will incorporate benchmark revisions, which should lower the underlying trend in job growth by about 25-30k per month.  The Bureau of Labor Statistics published its estimate of the benchmark revisions a few months ago.  It estimated a downward revision of 306k (-358k excluding government jobs) in the level of Payrolls in March 2023.   This level adjustment should translate into a lower underlying m/m trend in the months after March 2023 of 25-30k.  The risk is that the headlines for Nonfarm Payrolls will be lower than consensus as a result.

There are several other important US economic data release this week regarding inflation.  Consensus looks for 1.0% (q/q) increase in the Employment Cost Index in Q423, slightly slower than the 1.1% in Q323.  There may be downside risk to the consensus estimate, reflecting smaller bonuses and sales commissions  Consensus also looks for small increases in Compensation/Hour and Unit Labor Costs in Q423.  Perhaps even more important is the expectation of a good-sized 2.4% (q/q, saar) increase in Q324 Nonfarm Productivity.  This would be the third quarter in a row when productivity growth exceeded the 1.0-1.5% typically-estimated trend.  If the trend has moved up, it would allow for faster growth and higher wage increases without being inflationary.