The stock market is facing an ideal macro-economic backdrop of strong growth and low inflation, with the latter holding down the markets' probability of a December Fed rate hike to 33%. So, the market's rally is likely to continue, helped as well by good Q317 corporate earnings. The Treasury market may have room to further unwind the risk of near-term Fed tightening, but this week's Fed speakers could impact the odds one way or the other. The curve could steepen, as the absence of a December Fed rate hike would raise the probability of higher inflation in the future.
Fed speakers could be this week's highlights, impacting the odds of a December rate hike. If they focus on the latest low reading of the Core CPI, the probability of a hike could fall even more. But, if, as more likely, they adhere to the Fed's position that inflation is expected to pick up ahead, the probability could climb a bit. The most important speakers will be NY Fed President Dudley on Wednesday and Cleveland Fed President Meister (hawk) and Yellen on Friday.
The Claims data have best indicated the economy's strength among US economic data. Although Initial Claims spiked after the hurricanes struck, they have been coming down quickly and were close to their lows in the latest report. Remarkably, Continuing Claims were impacted for only one week. They fell steadily since, making new lows in the latest report. They suggest very temporary job losses from the hurricanes and strong demand for labor. Note that an Initial Claim is filed when a person is newly unemployed. A Continuing Claims is filed in each subsequent week that the person is still unemployed.
The Fed's models continue to project above-trend Q317 GDP growth. The NY Fed model is tracking 1.7% (q/q, saar), while the Atlanta Fed model is at 2.7%. Trend is viewed about 1.5%.
Initial Claims Continuing Claims
July Avg 243k 1.963 Mn
Aug Avg 237 1.951
8/26 Week 236 1.951
9/2 298 1.936
9/9 282 1.979
9/16 259 1.936
9/23 272 1.921
9/30 260 1.886
10/7 243 na
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