Trade War/Slowdown Fears to Continue, Inflation Fears Too?

The stock market is likely to remain on edge this week in the face of trade war fears and important US economic data.  To be sure, stocks tend to do well ahead of the July 4th holiday, and there may be some bounceback from month-/quarter-end window dressing last week.

Trade war fears will likely rise ahead of the July 6th effective date for US tariffs on $34 Bn of Chinese imports and Chinese tariffs on US-made cars and agricultural products.  The Canadian retaliatory tariffs, imposed on Friday, show a stern response to the US, reducing the odds of a step back by China, Europe or the US.  However, Canada did not signal a further escalation, leaving the next move to the US.   The worst case scenario is if a stock market drop is needed to persuade the Trump administration to ease up in its trade offensive.

Fears of a US economic/profits slowdown should remain a concern, given the strength of the dollar and oil prices.  The Atlanta Fed model lowered its projection of Q218 Real GDP Growth sharply to 3.8% last week (was 4.5%), largely a result of weak consumer spending in May.  Much of the latter's weakness stemmed from a weather-related drop in spending on electricity and natural gas, as cooler-than-normal temperatures depressed the use of air conditioning.  This drop is temporary and will rebound either in June or during Q318, as the weather returns to normal.   The Atlanta Fed's latest projection assumes the snapback occurs in June, which may be too optimistic.  The NY Fed model's Q218 Real GDP projection continues to edge down, now at 2.8%.  It forecasts 2.5% for Q318.

This week's US economic data should continue to signal solid growth.  Even if consensus is right that the June Mfg ISM edges down to 58.0 from 58.7, the level would be historically high.  And, the risk is for a counter-consensus increase, matching once again the direction of the Richmond Fed Mfg Index (each of past 5 months).   Consensus looks for a +200k m/m increase in June Payrolls, in line with the +207k m/m average so far this year.  The Unemployment Rate is expected to be a steady 3.8%.

The most interesting data should be June Average Hourly Earnings.  Consensus looks for +0.3% m/m.  Although consistent with the implications of calendar considerations, it could spark market talk of a pickup in wage inflation.  This is because AHE was stronger than implied by calendar considerations when it rose 0.3% in May.  Another 0.3% in June would heighten concerns the May jump was not an aberration but the start of a ratcheting up in wage inflation.  At 0.3% m/m in June, the y/y would rise to 2.8% from 2.7% in May.  It was 2.7% over 2017, as well.