An Upturn After a Bottom in Stocks? This Week's Key US Economic Data

The stock market may have put in a bottom last week, after it held a key support level.  While there are still potential hurdles before a sustained rally, there is reason to think the worst is over.

The size and speed of the October-December descent was shocking.  Here's one explanation.  Stock market valuation was based on expectations of 3% sustained GDP Growth, counting on Trump's pro-growth mantra.  These expectations were punctured by two events.  First, Powell's early-October comment regarding the so-called neutral rate underscored that the Fed did not intend to support such a high trend.  Second, Trump's trade war with China showed he was willing to accept a near-term hit to the economy for a long-term gain.  Algorithmic trading models caused a very quick and sharp market adjustment to these changed factors. 

With at least the bulk of the market adjustment likely over, stocks likely have room to climb as long as GDP is seen growing near the Fed's 1.8-2.0% trend GDP growth and not headed into recession.  There still may be a few hurdles before a sustained rally, however.  This week's key US economic data -- December Mfg ISM, Payrolls, Unemployment -- risk being on the soft side (see below).  But, they may not have a significant or lasting impact on the stock market, which already has adjusted down to low-growth expectations.  Moreover, the Treasury market has built in expectations of no Fed hikes in 2019, which shouldn't change as a result of these data.  A possibly more important hurdle is the Q418 earnings season, beginning mid-January.  The stock market has not done well in the past two reporting periods.  Earnings are expected to slow y/y but still be strong; their macroeconomic background has weakened a bit (see my blog on Dec 16).

There are some near-term positives for the market, as well.  Internationally, US/China negotiations are set to resume in early January.  China is in the process of passing legislation prohibiting forced technical information transfer.   And, Trump issued positive tweets about them.  Domestically, resolution of the budget impasse in Washington presumably will happen soon.

This Week's Key US Economic Data
Evidence points to a decline in the Mfg ISM (due January 2), consistent with the consensus estimate of 58.0 versus 59.3 in November.   Other business surveys weakened this month, including the Chicago PM (correctly predicted m/m direction of Mfg ISM in each of the past 7 months).  

The consensus estimate of a speedup in December Nonfarm Payrolls to +180k m/m from +155k in November may be optimistic.  The Claims data have softened a bit, as did the jobs components (on balance) in the Conference Board Consumer Confidence Survey.  

Consensus looks for a steady 3.7% Unemployment Rate.  There is downside risk from rounding analysis.  On an unrounded basis, the Rate was 3.67% in November, so a small decline could round the headline down to 3.6% while a large increase is needed to round it up to 3.8%.

Consensus looks for +0.3% m/m  in Average Hourly Earnings, which is consistent with calendar considerations.  There is downside risk from a composition shift toward lower-paid holiday workers.  Consensus looks for a dip in the y/y to 3.0% from 3.1%.   The y/y print would fall to 2.9% if the unrounded m/m is 0.26-0.27%.