The stock market rally should continue for the next few weeks. The Kavanaugh confirmation vote is at least a week off as the FBI conducts its investigation, and, except for possible implications for the midterm elections, is not market relevant in any case. The trade dispute with China is a longer-term issue, which the market correctly quickly discounts after knee-jerk reactions to headlines. Trade agreements with Canada (tonight?) and EU are more likely to be reached sooner than that with China. And, this week's key US economic data should confirm strong growth.
Monday's release of the September Mfg ISM risks a counter-consensus increase, based on the higher Richmond Fed Mfg Index (having correctly predicted the m/m direction of Mfg ISM each month this year). Even the consensus expectations of a dip to 60.3 from 61.3 would keep the Index at a very high level. Consensus also looks for a dip in the Prices component, which would support the Fed's view that inflation will remain in check -- and possibly temper any softening reaction in Treasury prices to the strong real-side data.
An increase in the Mfg ISM would raise the risk of a counter-consensus increase in the September Non-Mfg ISM, due Wednesday. The two moved in the same direction in each of the past 6 months.
The September Employment Report should confirm above-trend economic growth, but hint at some moderation -- not out of line with the Fed's forecast of a slowdown in Q418. The +185k m/m consensus estimate for Payrolls is below the +207k m/m average so far this year. And, there is downside risk coming from the ending of summer jobs for students that exceeds the seasonal expectation. The flooding from Hurricane Florence probably had little, if any, impact on Payrolls, since it hit the Carolinas at the end of the Payroll Survey Week. Consensus also looks for +185k for the ADP Estimate. The ADP Estimate does not show any bias in predicting September Payrolls in the past few years.
The consensus estimate of a decline in the Unemployment Rate to 3.8% from 3.9% in August is reasonable. The Rate was 3.85%, so even a slight dip would round down the headline print to 3.8%. An increase in Labor Force Participation could keep the Rate steady at 3.9%. This possibility gains credence by the strength of the jobs components of the Conference Board's Consumer Confidence Survey -- people could return to the labor force as job opportunities become widely seen. An increase in Labor Force Participation is a positive for both stocks and Treasuries, as it dampens the inflationary implications of strong economic growth.
Consensus looks for a slowdown in Average Hourly Earnings to +0.3% m/m from the high +0.4% in August. A 0.3% print would argue the trend has ratcheted up a bit. AHE averaged 0.24% m/m so far this year, rising 0.3% or more half the time. Calendar considerations point to a 0.3% print for September, although they may not be reliable after missing in August. It is possible the high August print resulted from an ending of relatively low-paid summer jobs. This might be the case in September, as well. If this is the reason, AHE should slow if not in September than in subsequent months. For September, the y/y would dip to 2.8% from 2.9% with a 0.3% m/m print.
Sunday, September 30, 2018
Wednesday, September 26, 2018
A Cautious Fed Outlook
Stocks and Treasuries should like today's FOMC Statement. The Fed took a cautious approach to the forecast at today's FOMC Meeting, keeping them consistent with a gradual approach to tightening. It looks for GDP Growth to slow sharply from the 4+% pace of Q218 and perhaps Q318, keeping its forecast of growth reverting to the 1.8-2.0% trend over the next two years. Inflation is expected to stay around 2.0% and the Unemployment Rate to stabilize in the 3.4-3.8% range. Their inflation and unemployment forecasts were little changed from the prior set of Central Tendency forecasts.
The upward revision to 2018 Real GDP Growth risks being insufficient, however. It was raised to 3.0-3.2% (was 2.7-3.0%). This implies 1.2-2.0% for Q418 Real GDP Growth, given the 3.2% H118 pace and assuming the Atlanta Fed model's Q318 forecast of 4.4% is correct. The risk is that Q418 Real GDP Growth will be substantially stronger. Next week's key US economic data -- the September Mfg ISM and Employment Report -- are likely to confirm a continuation of strong growth at the end of Q318.
The upward revision to 2018 Real GDP Growth risks being insufficient, however. It was raised to 3.0-3.2% (was 2.7-3.0%). This implies 1.2-2.0% for Q418 Real GDP Growth, given the 3.2% H118 pace and assuming the Atlanta Fed model's Q318 forecast of 4.4% is correct. The risk is that Q418 Real GDP Growth will be substantially stronger. Next week's key US economic data -- the September Mfg ISM and Employment Report -- are likely to confirm a continuation of strong growth at the end of Q318.
Sunday, September 23, 2018
Some Market Hurdles and The FOMC Meeeting
While the Fed's FOMC Meeting on Tuesday and Wednesday should be the highlight this week, the stock market needs to get through two negative headlines -- the Chinese cancellation of trade talks with the US this week and an apparent White House memo regarding anti-trust investigations of social media companies. In addition, the already announced tariffs on Chinese imports go into effect on Monday, but they should exert only a slight drag on US GDP growth (see my September 17 blog).
The negative headlines represent longer-term concerns for the markets, which could be put on the back burner for now. The reported Chinese decision not to hold high-level trade talks with the US this week shows the issues will take a long time to get resolved. At this point, both sides do not appear willing to compromise. The White House memo regarding social media companies underscores the potential of government interference in the industry. But, any anti-trust investigation is in the future, possibly becoming a more significant risk next year.
Stocks should take this week's FOMC Meeting in stride if not positively. At the minimum, the Fed should retain its gradual approach to tightening (including a 25 BP hike at this meeting). The Statement risks changing the description of monetary policy from saying “the stance of monetary policy remains accommodative,” based on the minutes from the August meeting. Instead, it would indicate the funds rate is "moving closer to the range of estimates of its neutral level." The markets could take it to mean the end of the tightening cycle is in sight, although the minutes of the July meeting indicate officials believe neutrality will be reached in 2019.
The Fed's Central Tendencies should show stronger GDP Growth. A Central Tendency Range of 3.0-3.5% is reasonable, given the 3.2% H118 GDP pace and the Atlanta Fed model's 4.4% forecast for Q318. It remains to be seen whether the Fed raises its projection of 2019 and 2020 Real GDP Growth, as well.
There are two important questions. First, does the Fed still see Real GDP Growth converging to trend by 2020? If so, the forecast would imply officials think the very strong growth of 2018-19 is temporary and their gradual approach to tightening will be enough to contain economic growth. Second, did the Fed raise its estimate of trend from 1.8-2.0%. (A higher estimate of trend productivity growth would be the most likely reason for their doing so.) A boost in trend GDP Growth would be a significant positive for the stock market. It would imply that strong GDP Growth does not have to be restrained as much as would be the case were trend in the 1.8-2.0% range -- a positive for the profits outlook.
The Central Tendencies for the Unemployment Rate and inflation should be little changed. Both the Total and Core PCE Deflator have risen an annualized 2.0-2.1% since December 2017.
Fed's Central Tendency Forecasts
(Q4/Q4 percent change)
2018 2019 2020 Trend
Real GDP Growth 2.7-3.0 2.2-2.6 1.8-2.0 1.8-2.0
Unemployment Rate 3.6-3.7 3.4-3.5 3.4-3.7 4.3-4.6
PCE Deflator 2.0-2.1 2.0-2.2 2.1-2.2 2.0
Core PCE Deflator 1.9-2.0 2.0-2.2 2.1-2.2 na
Fed Chair Powell's post-meeting press conference may underscore the Fed's pro-growth focus. He is said to admire Greenspan's restraint from tightening policy in the late 1990's based on his insight that the technological revolution with the internet would hold down inflation. There was a lot of economic and social benefits at the time coming from the Unemployment Rate being allowed to fall to 3.8-4.0%. And, Powell could reiterate the benefits in the current situation, with inflation under control.
.
The negative headlines represent longer-term concerns for the markets, which could be put on the back burner for now. The reported Chinese decision not to hold high-level trade talks with the US this week shows the issues will take a long time to get resolved. At this point, both sides do not appear willing to compromise. The White House memo regarding social media companies underscores the potential of government interference in the industry. But, any anti-trust investigation is in the future, possibly becoming a more significant risk next year.
Stocks should take this week's FOMC Meeting in stride if not positively. At the minimum, the Fed should retain its gradual approach to tightening (including a 25 BP hike at this meeting). The Statement risks changing the description of monetary policy from saying “the stance of monetary policy remains accommodative,” based on the minutes from the August meeting. Instead, it would indicate the funds rate is "moving closer to the range of estimates of its neutral level." The markets could take it to mean the end of the tightening cycle is in sight, although the minutes of the July meeting indicate officials believe neutrality will be reached in 2019.
The Fed's Central Tendencies should show stronger GDP Growth. A Central Tendency Range of 3.0-3.5% is reasonable, given the 3.2% H118 GDP pace and the Atlanta Fed model's 4.4% forecast for Q318. It remains to be seen whether the Fed raises its projection of 2019 and 2020 Real GDP Growth, as well.
There are two important questions. First, does the Fed still see Real GDP Growth converging to trend by 2020? If so, the forecast would imply officials think the very strong growth of 2018-19 is temporary and their gradual approach to tightening will be enough to contain economic growth. Second, did the Fed raise its estimate of trend from 1.8-2.0%. (A higher estimate of trend productivity growth would be the most likely reason for their doing so.) A boost in trend GDP Growth would be a significant positive for the stock market. It would imply that strong GDP Growth does not have to be restrained as much as would be the case were trend in the 1.8-2.0% range -- a positive for the profits outlook.
The Central Tendencies for the Unemployment Rate and inflation should be little changed. Both the Total and Core PCE Deflator have risen an annualized 2.0-2.1% since December 2017.
Fed's Central Tendency Forecasts
(Q4/Q4 percent change)
2018 2019 2020 Trend
Real GDP Growth 2.7-3.0 2.2-2.6 1.8-2.0 1.8-2.0
Unemployment Rate 3.6-3.7 3.4-3.5 3.4-3.7 4.3-4.6
PCE Deflator 2.0-2.1 2.0-2.2 2.1-2.2 2.0
Core PCE Deflator 1.9-2.0 2.0-2.2 2.1-2.2 na
Fed Chair Powell's post-meeting press conference may underscore the Fed's pro-growth focus. He is said to admire Greenspan's restraint from tightening policy in the late 1990's based on his insight that the technological revolution with the internet would hold down inflation. There was a lot of economic and social benefits at the time coming from the Unemployment Rate being allowed to fall to 3.8-4.0%. And, Powell could reiterate the benefits in the current situation, with inflation under control.
Monday, September 17, 2018
Trump's Tariffs Should Have Only A Slight Drag on US GDP Growth
Trump's latest tariffs on Chinese imports -- 10% to year end and then 15% starting January 1 -- should exert only a slight drag on US GDP Growth. I estimate they will subtract about 0.2% pt from annualized GDP Growth in Q418 and 0.3-0.4% in Q119.
The first round of tariffs would represent a $20 Bn tax if they were all passed through to the consumer. If consumption fell by the full amount, it would equal slightly less than 0.1% of the level of GDP -- or 0.4% pt off the annualized quarterly growth rate when they hit. But, not all of the tariffs may be passed through. And, the tariffs could come out of savings rather than spending. Moreover, the dollar should strengthen, offsetting to some extent the impact of the tariffs on import prices -- although a stronger dollar also would hurt US exports. Net, I estimate about half the full effect hurting the US GDP growth rate.
The first round of tariffs would represent a $20 Bn tax if they were all passed through to the consumer. If consumption fell by the full amount, it would equal slightly less than 0.1% of the level of GDP -- or 0.4% pt off the annualized quarterly growth rate when they hit. But, not all of the tariffs may be passed through. And, the tariffs could come out of savings rather than spending. Moreover, the dollar should strengthen, offsetting to some extent the impact of the tariffs on import prices -- although a stronger dollar also would hurt US exports. Net, I estimate about half the full effect hurting the US GDP growth rate.
Sunday, September 16, 2018
Good Economic Fundamentals Remain Intact -- History and Policy
Amidst mixed headlines about tariffs and trade negotiations, the good economic fundamentals behind the stock market rally remain intact. Last week's US economic data showed continuing strong growth while inflation remains in check. The Atlanta Fed's model projects 4.4% for Q318 Real GDP Growth, with Friday's Retail Sales report (thanks to upward revisions to June and July) boosting its estimate of consumption. Besides the low August Core CPI, the Mid-September Michigan Consumer Sentiment Survey showed a pullback in the important 5-year inflation expectations to their recent low of 2.4%. This week's data releases are relatively minor.
The past week also saw a couple of well-known economists, Larry Summers and Paul Krugman, address the causes of the last recession and anemic recovery. Summers highlighted a non-conventional specification of expectations to explain the depth of the recession. Krugman blamed the stubborn insistence of Republicans on preventing large enough fiscal stimulus for the slow recovery. I view Summers' idea as another attempt by him to shift the focus away from policy mistakes, as did his earlier promotion of "secular stagnation" to explain the anemic recovery. I agree with Krugman regarding the Republicans, but it is not the full story. The Democrats deserve part of the blame for the weak recovery, as well.
To better understand the role of policy in the 2008-09 recession and aftermath requires starting in 2003 when China began using its currency to grab market share and eviscerate the US manufacturing sector. From a macro perspective, some sector of the US economy had to spend more than it earned to offset the drag on GDP from the Chinese incursion. Policymakers, particularly the Fed, relied on the household sector to do so by allowing people to borrow through credit cards and mortgages. Democratic Senators and Congressmen exacerbated this effort by pushing FNMA and Freddie Mac to buy subprime mortgages. This allowed banks to issue subprime mortgages without keeping them on their balance sheets, which explains why they were not as careful in approving mortgages as they should have been. But, then, many of the banks bought the packaged mortgages or leveraged versions of them -- perhaps thinking that agency bonds would not be allowed to default, taking on excessive risk -- which the Fed did not stop in its supervisory role. The result was that relying on the household sector to overspend was not a sustainable approach to offsetting the macro effects of the Chinese incursion.
The risk to mortgages and its derivatives materialized after the Fed began hiking rates in 2005. This led to a pickup in mortgage defaults over the next couple of years, which led the markets to downgrade the value of the mortgage-related securities. With potentially large losses on the banks' books, interbank lending began to dry up as no one could trust the credit worthiness of its counterparts.
In this situation, Bernanke and the Fed made several major mistakes in 2008. First, they viewed the market problem as a liquidity problem. So, they cut the funds rate aggressively over the year. However, the problem was not illiquidity but a lack of confidence. The main result of the lower rates was to boost commodity prices, particularly oil -- which rose to $140/bbl in the summer. The latter killed the consumer. Second, the Fed and Treasury exacerbated the confidence problem by allowing Lehman Brothers to fail. Third, Bernanke and Treasury Secretary Paulson went on TV in September saying the US economy was headed to the worst recession ever -- in order to convince Congress to pass TARP. This prediction killed business expectations, and massive layoffs followed right afterwards.
The consensus narrative of the recession blames the supposed greed of banks for overdoing it on allowing people to take on debt. However, this story does not recognize that banks were doing what policymakers wanted in order to keep GDP Growth up while China was depressing the US manufacturing sector. This incomplete analysis led to overly tight restrictions on bank lending in the aftermath of the recession. This was one major reason for the subpar recovery. The restrictions could not be fully offset by low interest rates because of the zero bound on the latter.
Obama made things worse by blaming the bankers (and the one percenters) for the recession. FDR had done the same thing in the 1930s, using his speeches to castigate businesses. Official berating may have been more important than generally thought in preventing the US economy from rebounding more strongly than it did from the 1931-32 recession. (The failure of the economy to rebound strongly in the 1930s is, I believe, a conundrum for economic historians.) The same result could have been in play in the more recent recovery. Moreover, many of Obama's regulatory actions had anti-growth implications (regardless of whether you agree or not with their aims).
This way of analyzing the 2008-09 recession and subsequent subpar recovery puts a different light on policy under the Trump administration than how it is frequently portrayed. The Republican's shift to deficit spending is not as wrongheaded as many think if it is viewed as a belated move to offset the drag from Chinese imports. The recent easing up of Dodd-Frank bank regulations is in the right direction. And, Trump's pro-business tendencies and deregulatory actions may be important stimulants for economic growth.
The analysis also helps explain why both establishment Democrats and Republicans have fared poorly in elections. Voters at least implicitly understand that both are to blame for the poor economic performance of the past 10 years.
Follow me on Twitter at @cjslyce. I may comment on just-released US economic data or other market developments.
The past week also saw a couple of well-known economists, Larry Summers and Paul Krugman, address the causes of the last recession and anemic recovery. Summers highlighted a non-conventional specification of expectations to explain the depth of the recession. Krugman blamed the stubborn insistence of Republicans on preventing large enough fiscal stimulus for the slow recovery. I view Summers' idea as another attempt by him to shift the focus away from policy mistakes, as did his earlier promotion of "secular stagnation" to explain the anemic recovery. I agree with Krugman regarding the Republicans, but it is not the full story. The Democrats deserve part of the blame for the weak recovery, as well.
To better understand the role of policy in the 2008-09 recession and aftermath requires starting in 2003 when China began using its currency to grab market share and eviscerate the US manufacturing sector. From a macro perspective, some sector of the US economy had to spend more than it earned to offset the drag on GDP from the Chinese incursion. Policymakers, particularly the Fed, relied on the household sector to do so by allowing people to borrow through credit cards and mortgages. Democratic Senators and Congressmen exacerbated this effort by pushing FNMA and Freddie Mac to buy subprime mortgages. This allowed banks to issue subprime mortgages without keeping them on their balance sheets, which explains why they were not as careful in approving mortgages as they should have been. But, then, many of the banks bought the packaged mortgages or leveraged versions of them -- perhaps thinking that agency bonds would not be allowed to default, taking on excessive risk -- which the Fed did not stop in its supervisory role. The result was that relying on the household sector to overspend was not a sustainable approach to offsetting the macro effects of the Chinese incursion.
The risk to mortgages and its derivatives materialized after the Fed began hiking rates in 2005. This led to a pickup in mortgage defaults over the next couple of years, which led the markets to downgrade the value of the mortgage-related securities. With potentially large losses on the banks' books, interbank lending began to dry up as no one could trust the credit worthiness of its counterparts.
In this situation, Bernanke and the Fed made several major mistakes in 2008. First, they viewed the market problem as a liquidity problem. So, they cut the funds rate aggressively over the year. However, the problem was not illiquidity but a lack of confidence. The main result of the lower rates was to boost commodity prices, particularly oil -- which rose to $140/bbl in the summer. The latter killed the consumer. Second, the Fed and Treasury exacerbated the confidence problem by allowing Lehman Brothers to fail. Third, Bernanke and Treasury Secretary Paulson went on TV in September saying the US economy was headed to the worst recession ever -- in order to convince Congress to pass TARP. This prediction killed business expectations, and massive layoffs followed right afterwards.
The consensus narrative of the recession blames the supposed greed of banks for overdoing it on allowing people to take on debt. However, this story does not recognize that banks were doing what policymakers wanted in order to keep GDP Growth up while China was depressing the US manufacturing sector. This incomplete analysis led to overly tight restrictions on bank lending in the aftermath of the recession. This was one major reason for the subpar recovery. The restrictions could not be fully offset by low interest rates because of the zero bound on the latter.
Obama made things worse by blaming the bankers (and the one percenters) for the recession. FDR had done the same thing in the 1930s, using his speeches to castigate businesses. Official berating may have been more important than generally thought in preventing the US economy from rebounding more strongly than it did from the 1931-32 recession. (The failure of the economy to rebound strongly in the 1930s is, I believe, a conundrum for economic historians.) The same result could have been in play in the more recent recovery. Moreover, many of Obama's regulatory actions had anti-growth implications (regardless of whether you agree or not with their aims).
This way of analyzing the 2008-09 recession and subsequent subpar recovery puts a different light on policy under the Trump administration than how it is frequently portrayed. The Republican's shift to deficit spending is not as wrongheaded as many think if it is viewed as a belated move to offset the drag from Chinese imports. The recent easing up of Dodd-Frank bank regulations is in the right direction. And, Trump's pro-business tendencies and deregulatory actions may be important stimulants for economic growth.
The analysis also helps explain why both establishment Democrats and Republicans have fared poorly in elections. Voters at least implicitly understand that both are to blame for the poor economic performance of the past 10 years.
Follow me on Twitter at @cjslyce. I may comment on just-released US economic data or other market developments.
Sunday, September 9, 2018
Stock Market Hurdles This Week
Stocks could stabilize this week, as they might have already largely adjusted to the risk of additional tariffs on Chinese imports and apprehension of Thursday's August CPI report. Apple's new product event on Wednesday may be a positive.
At this point, Trump seems to believe more pressure on the Chinese leadership is needed to change their policy regarding foreign investments in their country. And, the US economy's strength, as seen in Friday's employment report, could mitigate any concern he might have of an untoward impact from tariffs. So, an announcement of additional tariffs would appear to be a real risk. This would not be the case if a meeting between Trump and Xi Jinping is announced for later in the month. But, this may be a long shot, as Trump has insisted that Xi Jinping be willing to address changing his economic growth policies in order to have the meeting. Although new tariffs would not go into effect immediately, their negative announcement impact on stocks could linger as Street economists lower their US GDP forecasts.
The hit to Real GDP Growth from a 25% tariff on $500 Bn of Chinese imports should be less than 1.0% pt, probably closer to 0.5% pt. If the entire $125 Bn in tariffs is passed through to consumers and reduces spending dollar for dollar, 0.7% pt would be subtracted from y/y Real GDP Growth. The spending reduction is likely to be less than dollar for dollar, though. Some of the tariffs may not be passed through, and, to the extent they are, some could reduce saving rather than consumption.
There would be indirect effects, as well, the net effect is indeterminate. A stronger dollar would hurt US net exports, which, in turn, could depress commodity prices. The latter would be a positive for consumption, but also be a negative for domestic mining and oil production. A stronger dollar and lower commodity prices would hurt emerging market countries, as well. Slower growth could persuade the Fed to slow its path of tightening, a pro-growth positive.
The consensus estimates of +0.3% m/m Total and +0.2% for August Core CPI look reasonable. (Y/Y would dip to 2.7% from 2.9% for Total and be steady at 2.4% for Core.) There still could be further pass-through of the tariffs in Household Appliance and New Vehicle prices and higher oil prices in Airline Fares. Most other prices should be subdued. It is of interest whether news accounts of a weakening in housing rent gets captured in the CPI. Housing rent is calculated as a moving average in the CPI, so their shifts tend to come in gradually.
On Friday, the market reacted to the high 0.4% m/m increase in August Average Hourly Earnings. AHE now has risen 0.3-0.4% m/m in 3 of the past 4 months. And, the calendar favors another high print for September 2018. A similarly sustained high wage inflation pace last occurred over September 2017-January 2018. This pickup in wage inflation may not be fully passed through to prices, however, since productivity growth has sped up, as well.
At this point, Trump seems to believe more pressure on the Chinese leadership is needed to change their policy regarding foreign investments in their country. And, the US economy's strength, as seen in Friday's employment report, could mitigate any concern he might have of an untoward impact from tariffs. So, an announcement of additional tariffs would appear to be a real risk. This would not be the case if a meeting between Trump and Xi Jinping is announced for later in the month. But, this may be a long shot, as Trump has insisted that Xi Jinping be willing to address changing his economic growth policies in order to have the meeting. Although new tariffs would not go into effect immediately, their negative announcement impact on stocks could linger as Street economists lower their US GDP forecasts.
The hit to Real GDP Growth from a 25% tariff on $500 Bn of Chinese imports should be less than 1.0% pt, probably closer to 0.5% pt. If the entire $125 Bn in tariffs is passed through to consumers and reduces spending dollar for dollar, 0.7% pt would be subtracted from y/y Real GDP Growth. The spending reduction is likely to be less than dollar for dollar, though. Some of the tariffs may not be passed through, and, to the extent they are, some could reduce saving rather than consumption.
There would be indirect effects, as well, the net effect is indeterminate. A stronger dollar would hurt US net exports, which, in turn, could depress commodity prices. The latter would be a positive for consumption, but also be a negative for domestic mining and oil production. A stronger dollar and lower commodity prices would hurt emerging market countries, as well. Slower growth could persuade the Fed to slow its path of tightening, a pro-growth positive.
The consensus estimates of +0.3% m/m Total and +0.2% for August Core CPI look reasonable. (Y/Y would dip to 2.7% from 2.9% for Total and be steady at 2.4% for Core.) There still could be further pass-through of the tariffs in Household Appliance and New Vehicle prices and higher oil prices in Airline Fares. Most other prices should be subdued. It is of interest whether news accounts of a weakening in housing rent gets captured in the CPI. Housing rent is calculated as a moving average in the CPI, so their shifts tend to come in gradually.
On Friday, the market reacted to the high 0.4% m/m increase in August Average Hourly Earnings. AHE now has risen 0.3-0.4% m/m in 3 of the past 4 months. And, the calendar favors another high print for September 2018. A similarly sustained high wage inflation pace last occurred over September 2017-January 2018. This pickup in wage inflation may not be fully passed through to prices, however, since productivity growth has sped up, as well.
Monday, September 3, 2018
Stocks Should Be Helped By US Economic Data This Week
Stocks should be helped by US economic data this week, as consensus looks for a pickup in some data and risk being too low on others. Evidence of continuing strength in the economy may very well more than offset September's seasonal stock market weakness, which is so well known that it may not matter in any case. The strong economy may even offset any negative impacts from trade negotiations, possible Mueller report, and FOMC Meeting this month. And, the FOMC Statement may contain a positive market surprise, as I discussed last week.
Two of the this week's key US economic data risk printing above consensus. The August Mfg ISM risks a counter-consensus increase, based on the higher Richmond Fed Mfg Index. The latter correctly predicted the m/m direction of the Mfg ISM each month so far this year. If the Mfg ISM rises, the risk is for an increase in the Non-Mfg ISM. The two moved in the same direction in each of the past 4 months.
Two of the data risk printing near consensus. Payrolls should speed up after the July slowdown, as both Initial and Continuing Claims resumed their decline in the past two months. Even if Payrolls don't rise as much as the 190k consensus, they still would exceed the pace consistent with a steady Unemployment Rate. The Unemployment Rate risks falling as a result, although it could hold steady if the Labor Force Participation Rate climbs.
Two of the data risk printing below consensus. ADP Estimate will likely be below consensus, after it was stronger than Payrolls in July. The August ADP Estimate reversed its July relationship to Payrolls in each of the past 3 years. So, it should underestimate Payrolls in August after it overestimated them in July. Average Hourly Earnings risk printing below consensus, based on calendar considerations. The y/y would dip to 2.6% from 2.7% in July.
This Week's Key US Economic Data
Consensus Estimate Prior Month Risk
Mfg ISM 57.7 58.1 59.0
ADP Estimate 190k 219k 175k
Non-Mfg ISM 56.8 55.7 57.0
Payrolls 190k 157k 190k
Unemployment Rate 3.8% 3.9% 3.8-3.9%
Avg Hourly Earnings 0.2% 0.3% 0.1%
Follow me on Twitter at @cjslyce. I may comment on just-released US economic data or other market developments.
Two of the this week's key US economic data risk printing above consensus. The August Mfg ISM risks a counter-consensus increase, based on the higher Richmond Fed Mfg Index. The latter correctly predicted the m/m direction of the Mfg ISM each month so far this year. If the Mfg ISM rises, the risk is for an increase in the Non-Mfg ISM. The two moved in the same direction in each of the past 4 months.
Two of the data risk printing near consensus. Payrolls should speed up after the July slowdown, as both Initial and Continuing Claims resumed their decline in the past two months. Even if Payrolls don't rise as much as the 190k consensus, they still would exceed the pace consistent with a steady Unemployment Rate. The Unemployment Rate risks falling as a result, although it could hold steady if the Labor Force Participation Rate climbs.
Two of the data risk printing below consensus. ADP Estimate will likely be below consensus, after it was stronger than Payrolls in July. The August ADP Estimate reversed its July relationship to Payrolls in each of the past 3 years. So, it should underestimate Payrolls in August after it overestimated them in July. Average Hourly Earnings risk printing below consensus, based on calendar considerations. The y/y would dip to 2.6% from 2.7% in July.
This Week's Key US Economic Data
Consensus Estimate Prior Month Risk
Mfg ISM 57.7 58.1 59.0
ADP Estimate 190k 219k 175k
Non-Mfg ISM 56.8 55.7 57.0
Payrolls 190k 157k 190k
Unemployment Rate 3.8% 3.9% 3.8-3.9%
Avg Hourly Earnings 0.2% 0.3% 0.1%
Follow me on Twitter at @cjslyce. I may comment on just-released US economic data or other market developments.
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