Friendly Developments for Stocks

The stock market should continue to be buoyed by the Fed-friendly implications of the April Employment Report this week.  And, in a subtle way, it should continue to be buoyed by Fed Chair Powell's comments, as well.  Powell appears reluctant to harm economic growth to fight inflation, which is a positive for the market's longer-term outlook.

In his post-FOMC news conference, Powell discussed what might bring down inflation without a recession.  He mentioned the lagged methodology by which Owners' Equivalent Rent (OER)  is calculated, saying that OER has not caught up to the flattening seen in private surveys.  His comment suggests that he sees the slow progress toward achieving the Fed's 2% inflation target more as technical rather than a fundamental problem.  Thus, he seems reluctant to aim at economic growth to fight inflation --  a positive for stocks.  Although he did not dismiss the Q124 high inflation prints as resulting from temporary factors, they, in fact, did reflect special factors, such as start-of-year price hikes and lagged pass-through of earlier price increases.  They overstated the underlying trend.  He probably realizes this, but had already rejected the idea of "exing-out" undesirable parts of a figure in past news conferences. 

The April Employment Report is not an all-clear for the Fed, however, so the markets should remain focused on upcoming US economic data for clues on the course of monetary policy.  To be sure, the Report points to continued modest economic growth in Q224.  From one measure, Total Hours Worked (THW) suggest about 2.0% Real GDP Growth for Q224, not that much different from the 1.6% in Q124.  THW stands 1.4% (annualized) above the Q124 average, just a little higher than the 0.9% (q/q, saar) in Q124.   From another measure, the uptick in the Unemployment Rate to 3.9% argues for a sub-2.0% GDP increase in Q224, as the Rate exceeds the 3.8% Q124 average and thus suggests below-trend growth.  The downtick in the Nonfarm Workweek suggests the post-winter bounce-back already has abated.  All these implications suggest the financial markets don't have to work as hard as otherwise to achieve non-inflationary growth.

The slowdown in Average Hourly Earnings to 0.2% m/m is good news for the Fed's anti-inflation fight.  However, it is too soon to give an all-clear for wage inflation, as the slowdown was not widespread.  Only 5 of the 13 sectors had wage increases of 0.2% or less.  The 3-month averages of about half of the sectors were 0.3% or less,