US Economic Data Need to Confirm a Slowdown to Stablize Markets

Stocks likely need to form a base after bouncing on Friday.  So, they will probably remain volatile for the next several weeks, with lower earnings guidance representing downside risk.  Whether stocks resume their uptrend could depend on a softening in upcoming US economic data.  Along with continuing low inflation, the latter would support the Fed's gradual approach to tightening and stabilize Treasuries.

Upcoming US economic data have to soften enough to confirm the Fed's expectation of a slowdown in Real GDP Growth to under 3% beginning in Q418.  Confirmation would reaffirm the Fed's commitment to a gradual tightening path.  And, Fed Chair Powell's unintended hint of more aggressive tightening would be left in the past.  The Atlanta Fed model's forecast may take on more importance than normal.  It typically gets the markets' attention, even though there is not enough data for a reliable forecast until the first month of the subsequent quarter.   The model's first estimate of Q418 Real GDP Growth should be released at the start of November.  Currently, it projects 4.2% for Q318 Real GDP.

A softening in US economic data needs to pull down the model's estimate to below 3.0% for Q418, but not so much as to raise the risk of a sharp slowdown to under 2%.  The latter would lift recession probabilities.  Friday's report of a dip in the Mid-October Michigan Consumer Sentiment Index to 99.0 from 100.1 in September was a start in the right direction.  In the coming week, the markets may find relief if the data -- covering the consumer, housing and manufacturing sectors -- are weaker than their prior 3-month averages (see table below). Consensus estimates are mixed relative to these averages.

Meanwhile, inflation remains subdued.  The Core CPI risks being held down by a slowdown in housing rent, as it was in September.  In addition, underlying import prices remain flattish.  Friday's report of a  0.5% m/m jump in September Import Prices was misleading with regard to the inflation outlook. Non-Fuel Import Prices were 0.0% and Non-Auto Consumer Goods Prices fell 0.1%.  Even more importantly from the Fed's view, the longer-term 5-year Inflation Expectations in the Michigan Consumer Sentiment Survey fell back to a low of 2.3% in mid-October.  Moreover, evidence of slower real growth should weigh on commodity prices ahead.

                                                  This Week's US Economic Data
                                       Consensus Estimate             Prior 3-Month Average
Retail Sales                                0.6% m/m                          0.16% m/m
Ex Auto Retail Sales                  0.4%                                  0.51%
Ex Auto/Gas Sales                     na                                       0.35%

Industrial Production                  0.2%                                  0.46%
Manufacturing Output                na                                       0.47%

Housing Market Index                67                                       67.3  level 
 
Housing Starts                           1.228 Mn                             1.211 Mn Units
Housing Permits                        1.229 Mn                             1.281 Mn Units

Initial Claims                              212k   level                          209.5k 4-wk avg
Continuing Claims                      1.665 Mn level                   1.656 Mn 4-wk avg

Phil Fed Mfg Index                    22.9                                     20.2  level

Existing Home Sales                 533k Units                           535k Units

Follow me on Twitter at @cjslyce.   I may comment on just-released US economic data or other market developments.  Note I commented on the CPI, Claims and Import Prices last week.