The markets are once again primarily focused on the battle between the US and China. The concern is that the battle will lead to a global recession. This week's US economic data could influence this concern, as real-side data are likely to be soft.
There are two aspects of the battle that should be kept in mind: /1/ The battle will not be resolved quickly. The US wants China to conform to the rules of the global trading system. China wants to follow its own rules of conduct. At issue is which country will dominate world trade. Since neither country seem willing to concede, the markets are likely to face continued headline risks for an extended period. To be sure, there could be positive surprises, such as the North Korean president's letter to Trump raising the possibility of ending missile testing and resuming talks. /2/ The Trump Administration is not entirely correct in blaming the recent dollar strength on Chinese FX intervention. US tariffs have the effect of boosting the dollar because they lower the expected trade deficit. And, bond arbitrage between Europe and the US also serves to lift the dollar.
US economic data will remain important for two reasons. First, they influence the probabilities of a negative fall-out from the US/China battle. Second, they influence the probabilities of another Fed rate cut. Weak data would not be stock-market friendly because of the first reason. But, the market impact would be mitigated because of the second.
At this point, there is evidence that caution is creeping into private economic decision making. The July Employment Report showed a dip in the Average Workweek, suggesting firms are pulling back on hours worked without cutting jobs significantly. The Claims data show companies are not in the aggregate firing workers in response to economic uncertainties. Initial Claims fell to 209k in the latest week, putting them below the 212k July average and the 218k Q219 average. But, hiring may have slowed, as suggested by Continuing Claims staying high. Continuing Claims fell to 1.684 Mn in the latest week, putting them slightly below the 1.687 Mn July average. But they remain just above the 1.680 Mn Q219 average. The low point was April. Continuing Claims need to fall further to suggest hiring has picked up.
The Atlanta Fed model's latest forecast is 1.9% for Q219 Real GDP Growth. This is in line with the longer-run potential growth rate as estimated by the Fed. But, there is not enough available data for the model's forecast to be reliable now.
This week's US real-side economic data risk being soft. /1/ The consensus estimate of +0.4% m/m July Retail Sales may be overly optimistic. Some of the gain may reflect higher-priced gasoline. If so, the more important Ex Auto/Ex Gasoline Retail Sales would be softer. Also, a pause after several months of strong gains in Ex Auto/Ex Gasoline would be typical. /2/ The consensus estimate of +0.1% m/m in July Industrial Production, with Manufacturing Output -0.1%, is not out of line with the flattish Total Hours Worked in Manufacturing Production Workers seen in the Employment Report. Such prints would underscore sluggish activity in that sector. /3/ Consensus looks for a decline in the August Phil Fed Mfg Index to 10 after it jumped to 21.8 in July. But, the latter missed the declines seen in the Mfg ISM and Markit Mfg PMI that month. So, it would be just catch-up.
The July CPI could be problematic for the markets. Consensus looks for the Core CPI to return to 0.2% m/m after +0.3% in June. Friday's release of the July PPI supports the idea of an easing of inflation pressures: the underlying PPI -- PPI Ex Food/Energy/Trade Services -- was -0.1% m/m in July after 0.0% in June. But, there are upside risk to the Core CPI from other sources. Apparel Prices could be up again, after +0.8% m/m in June -- as a result of bi-monthly sampling for this component. And, Owners' Equivalent Rent risk continuing to print 0.3% m/m or even 0.4%. A 0.2% m/m print for the Core CPI would keep the y/y steady at 2.1%. A high print for the Core CPI would temper expectations of a Fed rate cut, making it less of a mitigating factor regarding the US/China battle.
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