Any Macro Help for Stocks This Week?

The stock market may not get much relief from this week's US economic data or other macroeconomic/political developments.

The US economic data are expected to show a still strong economy with contained inflation.  A consensus 0.2% m/m increase in the October Core CPI cannot be ruled out.  Used car/truck prices may not fall as much as they did in September.  Their 3.0% m/m drop was responsible for the Core CPI rounding down to +0.1% m/m that month.  Even if the October Core CPI prints a below-consensus +0.1% m/m, it may not be enough to have more than a transitory effect on the market.  Fed officials may have to begin emphasizing a below-2.0% core inflation trend before the market reacts strongly to such prints.

So far, market talk regarding inflation has centered on the speedup in Average Hourly Earnings, a narrow measure of labor costs.  There has been little, if any, attention to the more subdued trends in the broader Compensation/Hour and Unit Labor Costs.  Fed officials understand they are the best measures of labor costs.  Their subdued trends could influence the Fed's forward guidance in a market-positive way at the December FOMC Meeting, even if, as is likely, the funds rate is hiked.

Note that while the newswires made much of Friday's high October PPI print, the underlying component -- Core Ex Trade Services -- was in line with its modest trend.   Moreover, the plunge in oil prices should lead to lower airfares and prices of other energy-intensive goods and services in coming months.  The plunge also frees up about $200 Bn for consumers (some of which could be offset by lower US oil production and exploration).

The split Congress coming out of the mid-term elections is a potential negative for stocks.  If Democrats in the House begin investigations aimed at undermining the Administration, they would likely be seen as a negative.  If the two sides cooperate with each other, negotiating legislation to address a variety of issues, the efforts would be good for society.  But, if they result in new fiscal stimulus, e.g., infrastructure spending or middle-class tax cuts, the financial markets will feel more pressure to move in ways that crowd out other spending.

Headlines regarding the upcoming Trump/Xi Jinping meeting should continue to provide temporary boosts to the stock market.  But, at most, the meeting will probably only result in Trump delaying additional tariffs on Chinese goods in return for continuing discussions and negotiations.  A resolution of the US/Chinese dispute will likely take a long time to be achieved.  So, the dispute would be put on the back burner by the markets after the meeting.

The global economic slowdown, caused in part by the tariffs and higher dollar, remains an issue for the stock market, particularly as it hurts earnings from abroad.  But, the slowdown acts as a drag on US exports, which takes pressure off US markets to crowd out other spending.  It also acts to hold down global and US domestic prices, which allows the Fed (and markets) to tolerate faster US real economic growth.   So, the market's concern may be overdone.