Fed on Stage This Week

The stock market will now be looking for evidence of a V-shaped recovery after the May Employment Report surprised to the upside.  While there are few data releases this week, the Fed's FOMC Statement should encourage this expectation as it promises a continuation of easy monetary policy.  Although the Statement will likely acknowledge the job bounce and decline in the Unemployment Rate last month, it may put them into context by emphasizing how they didn't fully undo the substantial damage done to the economy by the virus.  This would maintain the rationale for continuing an easy policy.  So, with Fed stimulus remaining and the economy improving, stocks have more room to rally.

The FOMC Statement should be little changed from the May Statement:

 /1/ The target funds rate range will be kept at 0-1/4%, with officials sticking with the idea that the virus "will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

 /2/ Quantitative easing will continue.  "To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.   In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations."

The Fed also will be releasing its Central Tendency Forecasts at this meeting.  They should reflect the expectation of an economic recovery in H220 discussed in the April FOMC Minutes.  The Central Tendency Forecasts are based on the forecasts from the twelve Fed District Banks and Fed Governors.  However, they tend not to diverge much from the Fed staff forecast, which, as described in the April Minutes, looks for a good-sized recovery in H220:

"Under the staff’s baseline assumptions that the current restrictions on social interactions and business operations would ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, although a complete recovery was not expected by year-end.   Inflation was projected to weaken this year, reflecting both the deterioration in resource  utilization and sizable expected declines in consumer energy prices. Under the baseline assumptions, economic conditions were projected to continue to improve, and inflation to pick back up, over the next two years."

This week's calendar of US economic data is light, with the Claims data the main new piece of evidence.  While a correct analysis of these data gave the right idea that consensus for the May Employment Report was too weak, the data did not predict the increase in Payrolls and decline in the Unemployment Rate.  This damages their usefulness to some extent.

Besides Claims, US inflation data for May will be released this week.  But, it is probably too soon to see a print that would boost inflation fears in the market.  Consensus looks for 0.0% m/m for both Total and Core CPI.  The less important May PPI also is expected to hover around 0.0% m/m for both Total and Core.  Consensus looks for Initial Unemployment Claims to edge down to 1.50 Mn from 1.877 Mn in the prior week, still an extraordinary high level.  It will be interesting to see if the University of Michigan Consumer Sentiment improves, in light of the May Employment Report.  A good-sized increase would provide some confirmation of the latter's strength.