More Hurdles for the Stock Market

The stock market is about to face another hurdle, with the start of the Q319 corporate earnings season.  Earnings are expected to be soft, with consensus about -3.5% y/y for the S&P 500 (see my September 22 blog).  Besides earnings, the market should continue to react more significantly to news on the US economy and US/China negotiations than the impeachment inquiry.  Any market reaction to the latter will likely be temporary.

Last week's US data tripped the stock market but did not undermine the rally.  The September Employment Report was strong enough to blunt the market's recession-interpretation of the weak 49.1 Mfg ISM (see below).   This coming week's economic news is centered on inflation measures -- the September PPI and CPI.

Both the Core PPI and Core CPI are expected to be benign.   Consensus looks for a benign 0.2% m/m increase in both, keeping the y/y at 2.4% for the Core CPI and 2.3% for the Core PPI.  Both printed 0.3% in August.  Lower-than-consensus print cannot be ruled out.  For the more important Core CPI, health services prices could flatten after an out-sized increase in August.  Owners' Equivalent Rent may stay low at 0.2%.  And, Apple's inclusion of a free year's streaming service with a new phone could be captured as a price decline by BLS.  However, some prices could be boosted by a pass-through of tariffs.  Whatever prints is not likely to stand in the way of an October Fed rate cut.
The Minutes of the October FOMC Meeting should be a non-event.  Fed Chair Powell has said many times the Fed will do what is needed to maintain economic growth in the midst of many downside risks.  And, I have argued that it will likely be persuaded to cut again or not by how the markets react to upcoming data (see my September 8 blog).  So far, global economic data remain weak, and the markets are building in a 25 BP rate cut at the October 29-30 FOMC Meeting. 

US/China negotiations are scheduled to resume late this week.  An agreement to continue talking may be more likely than a real breakthrough, since the underlying issues are fundamental to China and not easy to resolve.  And, news reports suggest China is not ready to agree to the reforms desired by the US.

The markets overreacted to the soft September Mfg ISM last week, believing it to be signaling recession.  Historically, the Mfg ISM tends to be well below 50 when the overall economy goes into recession.  According to ISM,  "A PMI^® reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI^® above 43.2 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 43.2 percent, it is generally declining."