Economic Data Back in Focus

Many of the hurdles faced by the stock market have fallen by the wayside.  Corporate earnings are better than expected, the Fed is on hold, a Brexit resolution has been delayed to January, and the "first phase" US/China agreement appears to be on track.  The House Impeachment Inquiry remains, but at this point Trump's removal would seem a long shot.   With Pelosi expecting a House vote by Thanksgiving, how it will play out in the Senate will likely be known by then.  Until that is fully resolved, the markets will probably be more focused on whether the US and global economies will soon be speeding up.

Evidence on economic growth so far is mixed.  Most Purchasing Manager Surveys moved up in October, but they are still at weak levels.  Construction Spending was up for Residential and Public activity in September, but business-related construction fell further.  The most positive data were the surge in October Payrolls (adding back GM strikers) and the concomitant increase in Total Hours Worked.  THW in October were 1.2% (annualized) above the Q319 average.  This is a strong start, considering they rose 1.0% in Q319.  They raise doubt on the Atlanta Fed model's early estimate of 1.1% (q/q, saar) Q419 Real GDP Growth.  The risk is that the model's estimate will move up as more data come in.

The most important economic development would be signs manufacturing weakness is ending.  This will not be seen in the October Industrial Production Report, due November 15.  Manufacturing Output should drop, as THW in Manufacturing fell 0.7% m/m last month.  However, this should be followed by a bounce in November, if only because of a rebound in motor vehicle production now that the GM strike is over.  Any positive impact from a US/China trade resolution would presumably be seen in data over the next few months, as well.

The markets should move to help sustain economic growth.  The dollar should fall further as the US/China dispute gets resolved.  Elimination of the threat of more tariffs should lift the expected trade deficit, putting downward pressure on the dollar.  In addition, stocks should continue to rally in anticipation of better economic growth now that the dispute has wound down.  While the longer-term Treasury yields should rise, they may not rise much given Friday's October Employment Report showing a higher Labor Force Participation  Rate.  The latter means faster growth need not be inflationary

Until signs of manufacturing improvement appear, the Fed remains a backup.  Although the October FOMC Statement dropped the phrase "will act as appropriate to sustain the expansion, " Powell's comment that the the Fed will act ahead if it sees evidence requiring a "material re-assessment of its outlook" essentially means the same thing.  The Fed should be viewed as being in the background to keep the economy growing if needed.