Since Thursday, the markets are catching up to the evidence of modest economic growth that I have been highlighting. This catch-up may continue at least through Friday's April Employment Report, which I expect to be weaker than consensus. At this point, however, I believe there are reasons to expect the stock market to renew its rally in June -- and this expectation could help the markets stabilize in the second half of May.
1. Some key US economic data should improve in May. For example, seasonal factors add to the m/m change in the May Mfg ISM relative to last year's seasonals (+0.2 pt versus -0.7 pt in April). May Mfg ISM is due June 1.
a. Note that April's print of 50.8 supports the idea of a speedup in Q2 GDP Growth -- albeit modest -- from the anemic 0.5% in Q116, as the April level is above the 49.5 Q116 average.
2. The Fed is likely to implicitly ease by 25 BPs at its June 14-15 FOMC Meeting.
a. This result would follow if (a) the Fed does not hike the funds rate and (b) signals only one hike this year in its forward guidance -- which would be down from the two hikes signaled at the March FOMC Meeting.
b. I don't believe Street Economists have caught on to looking at Fed policy this way (but the markets have). The Street Economists would consider this result being no change in Fed monetary policy rather than an easing.
3. UK presumably votes "no" regarding Brexit, scheduled for June 23.
4. Q216 Corporate Earnings -- reported in July -- are likely to improve relative to Q116: /1/ dollar is weaker, /2/ oil prices are higher, and /3/ Real GDP Growth is stronger. However, Real GDP Growth sped up by more in Q215 than is expected for Q216, so the y/y comparison should not be helped by the last factor.
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