Powell and Employment Report Should Help Stocks This Week

The stock market is likely to be buoyed by Fed Chair Powell's Semi-Annual Monetary Policy Testimony (Wednesday -- House, Thursday- Senate) and key US economic data.  Powell should reiterate the message from the last FOMC Meeting -- that economic growth is strong; inflation is expected to continue to slow;  rate cuts are still on the table, but the timing is uncertain.  The February Employment Report is expected to pull back from the surprising surges in Payrolls and Average Hourly Earnings seen in the January Report.

The Fed's Semi-Annual Monetary Policy Testimony is meant to reflect the collective view of Fed officials.  This view is found in the latest FOMC Statement, issued at the January FOMC Meeting.  Its depiction of the economy highlighted economic activity "expanding at a solid pace," a moderate but still strong pace of job creation, a low unemployment rate, and slower but still high inflation.  This macroeconomic background is a positive for the stock market.  It points to further corporate earnings gains and steady to easier Fed policy.

Powell should maintain the Fed's forecast of rate cuts in 2024, but say that a near-term cut is not likely,  as he did at the post-FOMC meeting news conference.  As said in the Statement, the FOMC will need to have "greater confidence that inflation is moving sustainably toward 2 percent" before rate cuts will be appropriate.  Recent speeches by Fed officials have reiterated this point.   Nevertheless, stocks (and Congress) should like that the Fed still retains the possibility of rate cuts ahead.  This possibility reduces the downside risk to the economic outlook. 

Consensus estimates of the key elements of the February Employment Report support the Fed's outlook.  Nonfarm Payrolls are expected to slow to a still-strong +200k m/m from the surprising +353k in January.  A steady 3.7% Unemployment Rate is seen.  Average Hourly Earnings (AHE) are expected to slow to 0.3% m/m from 0.6% in January.  And, the Nonfarm Workweek is seen moving up to a still-low 34.3 Hours from the outlandishly low 34.1 Hours in January.  Most interesting will be if the unusual prints of the January Report are revised away -- lowering the January Payroll and AHE prints and raising the Workweek print.  

Evidence supports the expectation of a slowdown in February Payrolls.  The Unemployment Claims data moved up in the month.  The Employment Component of the Mfg ISM fell.  And, the lower Workweek in January argues for softer job growth in February.  Moreover, the extremity of the January prints begs the question whether there was a measurement problem that will be cleared up in the revision or reversed in February.

Meanwhile, the Atlanta and NY Fed models now project 2.1-2.2% (q/q, saar) for Q124 Real GDP Growth, revised down sharply from 3.0-3.2% as a result of last week's data releases.  The latest estimated pace is slightly above the Fed's 1.7-2.0% long-run trend estimate and its December Central Tendency Projection of 1.2-1.7% for 2024.  The model estimates' downward revisions nevertheless should be welcome news for the Fed, as they show an economy moving toward its goal.  The model estimates still suggest strong productivity growth in the quarter, based on the decline in Total Hours Worked in January.