Macro Background Should Support Seasonal Strength in Stocks

The macroeconomic background should continue to support the stock market rally during its current seasonally strong period.  The stock market tends to climb from around Thanksgiving through the end of the year.  A strong stock market should keep upward pressure on Treasury yields, although the latter's Friday sell-off seems excessive and risks unwinding.

The slew of US economic data to be released this coming week, particularly October Retail Sales and CPI on Wednesday, should be stock-market friendly.  Consensus-like prints would encourage expectations for good holiday consumer buying amidst modest inflation.   Consensus looks for +0.3% m/m Ex Auto Retail Sales and +0.2% Core CPI. 

The markets already have built in a near-100% likelihood of a Fed rate hike at the December 12-13 FOMC Meeting.  So, this coming's week's strong US real-side economic data should have little effect on this expectation.  The odds of a December rate hike could pull back somewhat, however,  if the Core CPI comes in below consensus, as discussed in last week's blog.

The probability of a December rate hike also could decline if the November Employment Report, due December 8, softens substantially.  But, this is not a slam dunk. A softening in Payroll growth is conceivable as a result of less-than-seasonal holiday hiring by retailers, already announced by some large store chains.  And, the Unemployment Rate could rebound, as some of the decline in the labor force in October -- which depressed the Unemployment Rate then -- could have been hurricane related and temporary.  Average Hourly Earnings, however, risks printing on the high side.  They should rise a modest 0.1-0.2% m/m, based on calendar considerations.  But, the risk is for 0.3-0.4% from composition considerations -- average earnings would be boosted by the absence of low-paid holiday workers.  In the latter event, the y/y would rebound to 2.7-2.8% from 2.4% in October.

The markets were somewhat unnerved last week with the Senate proposal to delay the corporate tax cut to 2019, versus the House bill's start date of 2018.  The market reaction was wrong, according to my analysis of October 29.  There, I argued that a tax cut would lead to more aggressive Fed tightening and an increase in Treasury yields that would hit the economy when the boost from the tax cut is abating, thus risking the end of the economic expansion.  A delay in the tax cut, or a gradual implementation as is likely in a reconciliation bill, would push back the risk of that scenario.

A potential positive for stocks and negative for Treasuries next year is an easing of the Fed's bank regulations.   Both Powell, the nominee for Fed Chair, and Quarles, the new Fed Vice Chair for Supervision, appear to be in favor of doing so.  The policy response to the 2008 financial crisis was to clamp down on bank risk taking.  This was one reason for the sub-par economic recovery.  A relaxation would be a positive for economic growth.