Caution Up, But So Is Economy

Two of the three areas of concern for the market -- US/China negotiations and the impeachment inquiry -- risk exerting downward pressure on the stock market in the next couple of weeks.  US legislation supporting the Hong Kong protestors could be a stumbling block for a resolution ahead of the December 15 trigger of new US tariffs.  And, the House looks to be heading for a vote on impeachment at some point this month.  Meanwhile, US and global economic data are turning stronger, which is a positive for stocks.  This positive development may not be enough to offset the negative effects of these two areas of concern near term.

Ironically, the stronger economic data conceivably could tempt the US and China to dig in further to their positions, making a resolution more difficult to achieve.  The official Chinese PMI moved above 50 in November.  And, the risk is for the Mfg ISM to increase for the 2nd month in a row in November.  Consensus looks for it to rise to 49.2 from 48.3 in October.  The risk is for an even bigger increase, given that the figure measures the number of companies seeing steady to better performance regardless of the magnitude of of the improvement.  Most other surveys rose in November, including the Markit US Mfg PMI, Phil Fed Mfg Index and the Chicago PMI.

An increase in the November Mfg ISM (and a consensus-like increase in October Construction Spending) on Monday should boost the Atlanta Fed model's estimate of Q419 Real GDP Growth.  Last week's data already boosted it to 1.7% from 0.4%, bringing it better in line with the Total Hours Worked data in the October Employment Report.  GDP Growth of around 2.0% is around trend and should not cause a bit hit to Treasuries.  Longer-term yields should rise a bit but not so much as to undermine the stock market uptrend.   Much stronger economic growth that brings a Fed tightening back in the picture is what would derail the stock market uptrend.

Besides the US Mfg ISM, the other key report this week will be the November Employment Report.  Payrolls will be boosted by about 44k net returning strikers (GM workers).  Workers laid off in supplier companies because of the strike should return, as well.  Consensus expects +180k m/m for Total Payrolls, but the risk would seem to be on the higher side.  The Claims data argue for a stronger print than the +128k in October.

Although the returning strikers will not impact the Unemployment Rate, the underlying job gains are strong enough to suggest a further decline.  Consensus looks for a steady 3.6%, however.  Calendar considerations and possibly the inclusion of high-paid auto workers point to a 0.3% m/m print for Average Hourly Earnings, in line with consensus.  The y/y would be 3.0-3.1%, versus 3.0% in October.