While the stock market will focus on several major earnings releases this week, including Apple, Microsoft and Amazon, the more lasting impact may result from the January 29-30 FOMC Meeting and Friday's macroeconomic data. There is a risk the Fed is becoming "too friendly" in the face of strong economic growth. While positive for stocks near term, it could lead to trouble ahead from a Treasury market sell-off.
The markets will likely focus on two items in the FOMC Statement -- /1/ confirmation the Fed intends to keep the funds rate steady for awhile, and /2/ hints that the Fed will pare back its balance sheet reduction.
Regarding the funds rate, the key sentence in the December Statement that would have to change is:
"The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term."
There was no mention of balance sheet reduction in recent FOMC Statements. However, it was discussed extensively at the December meeting. The focus was on the desired amount of excess reserves and the potential volatility of the funds rate as the balance sheet is reduced. The reported discussion concluded with the sentence:
"Participants considered it important to present information on the Federal Reserve’s balance sheet to the public in ways that communicated these facts."
This information is more likely to be presented at Powell's February Semi-Annual Monetary Policy Testimony to Congress in February. But, since the latter is tied to the consensus formed at the January meeting, some mention of it in the Statement is possible.
Meanwhile, US economic growth continues to look strong. Initial Claims fell below 200k in the latest week, and Continuing Claims may have peaked. With the federal government shutdown over at least for the next 3 weeks, a Q418 Real GDP release might be available during this time. The Atlanta Fed model's latest projection is an above-trend 2.7% (q/q, saar). A relatively mild winter may be a factor boosting US economic growth so far in Q119.
Favorable weather could lift January Payrolls (due Friday), as well. (These will reflect benchmark revisions and new seasonal factors.) But, there could be offsets, making it difficult to judge the risks surrounding the +175k consensus estimate. Some of the December Payroll strength looks to have been catch-up from bad weather in November, so should not persist in January. Also, strong holiday-related hiring by retailers in November-December could unwind. And, while federal government workers who were furloughed or worked without pay during the shutdown will be included in Payrolls, there could have been layoffs at companies impacted by the shutdown. To be sure, those government workers who took temporary jobs during their furloughs could add to Payrolls. And, large retailers may have kept workers for delivery purposes as they compete with Amazon.
The government shutdown will not directly impact the Unemployment Rate. But, it will be important to see if the Rate (and the Labor Force Participation Rate) stays at 3.9%, as consensus expects. A still-high Labor Force Participation Rate would suggest trend economic growth is above the 1.8-2.0% seen by the Fed.
The chances are for a slowdown in Average Hourly Earnings in January.
Calendar considerations point to +0.1% m/m. There also could be an unwinding
of the composition shifts that boosted them in December. But, there could be an offset from the end of lower-paid holiday workers. A 0.1-0.2% m/m increase would lower the y/y to 3.0-3.1% from 3.2% in December. Consensus looks high at 0.3%.
The other important US economic release this week, the January Mfg ISM, risks rebounding -- which would be a stronger print than the steady 54.1 consensus estimate. Other surveys -- Markit US Mfg PMI, Phil Fed Mfg and Richmond Fed -- already did so. The Mfg ISM will reflect new seasonal factors.
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