There is little US macroeconomic data this week to significantly affect the markets, but headline risks -- Apple's Developers Conference, trade disputes, and Mueller investigation -- remain. Nevertheless, the macroeconomic background should sustain the stock market's uptrend into the summer, with headline risks likely imparting volatility rather than change in trend.
Real GDP is growing 3.3-4.8% (q/q, saar) in Q218, according to the NY and Atlanta Fed models. This would put the GDP Growth Rate at 2.8-3.5% in H118. The above-trend growth is seen in the further decline in the Unemployment Rate in May.
The near-term restraining risk from tighter financial conditions has abated, now that longer-term Treasury yields and oil prices are down from their highs. The part of financial conditions that is still tightening is the dollar exchange rate. The higher dollar is in part a response to Trump's tariffs as well as to the relatively strong US economy. But, the dollar's rise has been modest so far. And, there is a long lag before it noticeably impacts GDP.
The factor that could eventually slow the economy is a shortage of labor. The declines in the Labor Force Participation Rate and Unemployment Rate for two months straight highlight this possibility. But, this is down the road.
A falling Unemployment Rate risks putting upward pressure on wage rates and lead to more aggressive Fed tightening. But, it is too soon to say this is a near-term risk. Although Average Hourly Earnings rose an above-trend 0.3% m/m in May, it follows a below-trend 0.1% in April. The 2-month average is 0.2%, the same as the average m/m increase so far this year. The y/y was 2.7% in May, the same as over 2017.
The high 0.3% m/m in the April Core PCE Deflator does not mean the trend in inflation has picked up. The largest increases among components were Household Appliances and Airfares, reflecting the pass-through of tariffs and higher oil prices -- relative price changes. Other components did not look threatening.
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