Stock Market Should Retain a Positive Tone, But...

The stock market is likely to retain its positive tone this week, thanks to strong US and global economic growth.   But, any rally may be limited for now, as potential negative-Trump news out of Washington, raising doubts about the likelihood of tax reform, hangs over the market.  And, the risk of a rate hike at the June 13-14 FOMC Meeting could engender caution, with the caveat that the dovish Fed Governor Brainard speaks late Monday.

The expected rebound in Q217 Real GDP growth and growth-supportive financial markets are positive for stocks but also argue for a June Fed rate hike.  Last week, the Atlanta and NY Fed models lifted their forecasts of Q217 Real GDP Growth -- Atlanta to 4.1% from 3.6%, NY to 2.3% from 1.9%.  Both forecasts are above the economy's trend pace.

The economy may extend an above-trend pace into Q317, as the financial markets are generating pro-growth forces -- mentioned by NY Fed President Dudley in late March as an important consideration in monetary policy deliberations.  While the stock market fell sharply last Wednesday, the rebounds on Thursday and Friday offset much of the drop.  Meanwhile, Treasury yields and the dollar fell, keeping measures of financial market conditions in an uptrend.  The weaker dollar also is a positive for Q217 corporate profits.  

This week's US economic data are minor and should do little to influence Q217 GDP forecasts.  Consensus looks for dips in New and Existing Home Sales, but the levels should remain high.   On Friday, Q117 Real GDP Growth is seen being revised up to 0.9% from 0.7%.  The latter should be a modest positive for stocks, even though the pace is still low.

More important data are due in the following week.  They are likely to underscore the economy's strength.  May Mfg ISM risks rebounding, as did the Phil Fed Mfg Index (which correctly predicted direction of Mfg ISM in each of the past 5 months).  The May Employment Report should preserve the theme of a strong labor market with low wage inflation.  A decent gain in Payrolls and decline in the Unemployment Rate are the risk, based on the further improvement in the Claims data. But, Average Hourly Earnings should be low, about +0.1% m/m, based on calendar considerations, lowering the y/y to 2.4% from 2.5%.

The May 2-3 FOMC Meeting Minutes, due this coming Wednesday, might not reflect the more recent signs of economic strength, since the Statement focused on Q117 GDP weakness -- "the labor market has continued to strengthen even as growth in economic activity slowed."  But, the Minutes should indicate an expected speedup in Real GDP Growth in Q217, keeping alive the possibility of a June rate hike.

The dovish Fed Governor Brainard is scheduled to make a speech late Monday, which would be an important positive for the stock market if she argues against a June rate hike on the basis of low inflation.  Her speeches have accurately signaled the outcome of an FOMC meeting.  However, the June FOMC Meeting would seem to be too far away for her to make decisive statements.

The next significant development in the Trump-Russian controversy is likely to be former FBI Director Comey's testimony to the Senate Intelligence Committee.  Although this will occur after Memorial Day, reporters are on the hunt for any leaks or evidence regarding the controversy (and some Administration staff have been happy to accommodate them) --  so headline risk remains this week.

The Congressional Budget Office's costing of the House health insurance bill, due this week, risks setting back the legislative path toward tax reform.  But, several House committee meetings also are scheduled this week to work on tax reform.  The hope should remain.