The US/China trade truce should be only a short-term positive for stocks, with the dispute pushed to the back-burner for the next 2-3 months. The market focus now will be back squarely on the Fed. A December rate hike still looks to be in the cards. But, there may a pause in hiking in H119, as economic growth slows and inflation remains low.
Fed Chair Powell's testimony to the Joint Economic Committee on Wednesday should be a highlight of the week, along with the November Employment Report. It is unlikely he will be specific about a December hike or about the extent of tightening next year. Presumably, he is still constrained by the FOMC's forward guidance presented at the September Meeting.
Nevertheless, a December Fed rate hike now looks highly likely, based on Powell's characterization of the US economy as strong and the November FOMC Minutes. But, there are reasons to think the Fed might refrain from hiking rates in H119. There are hints economic growth may slow in Q119 before picking up again in Q219. If this pattern comes about, sufficient evidence to warrant renewed tightening probably would not be available until late Spring. And, core inflation may stay below 2.0% ahead.
Recent US economic data are beginning to support the downside risks to the outlook. In particular, both Initial and Continuing Unemployment Claims rose notably in
the past week or two. They need to stay high or rise further to maintain a bearish clue to the outlook.
Unemployment Insurance Claims (level, 000s)
Initial Continuing
July 214 1745
Aug 212 1720
Sep 206 1663
Oct 214 1635
11/3 wk 214 1670
11/10 216 1660
11/17 224 1710
11/24 234 na
Although the Claims data are not reliable evidence regarding the Employment Report, they suggest the consensus estimate of +200k
m/m November Payrolls is too high and steady 3.7% Unemployment Rate too
low.
Evidence regarding Monday's November Mfg ISM is mixed. The most reliable predictor -- Richmond Fed Mfg Index (correctly predicting direction in 9 of 10 months this year) -- points to a counter-consensus decline. The Chicago PM Index (correct in 7 of past 10 months) -- points to an increase.
To be sure, Q418 Real GDP Growth remains above trend -- in line with Powell's characterization of a currently strong economy. The Atlanta Fed model projects 2.6% for Q418 Real GDP Growth, with consumer spending climbing faster than 3%. The strength would justify a December rate hike.
Meanwhile, core inflation data have softened notably. The Core PCE Deflator has been flat to up only 0.1% m/m in 3 of the past 5 months. The 3-month annualized rate of change is 1.1%. The Market-Based Core PCE Deflator (which excludes imputed prices) has been flat to up 0.1% in 4 of the past 5 months. Its 3-month annualized rate of change is 0.5%. There are several reasons for the low underlying inflation rate, including a slowdown in Unit Labor Costs, softer import prices (in part, due to stronger dollar), and a moderation in housing rent. A filtering through of the recent drop in oil prices should add to these factors in holding down core inflation in coming months.
Core PCE Deflators (m/m percent change)
Oct Sep Aug Jul Jun May Apr Mar
Core PCE Deflator 0.1 0.2 0.0 0.2 0.1 0.2 0.2 0.2
Market-Based Core PCE Deflator 0.0 0.1 0.0 0.2 0.0 0.2 0.2 0.2
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