An Eventful Week Ahead

The stock market faces some big events this week, including earnings releases by major tech companies, an FOMC meeting, the Republican fiscal stimulus proposal, and the first print of Q220 Real GDP.  While positive outcomes are conceivable, the market will probably trade cautiously into them.

News reports suggest the Republican proposal will add up to $1 Tn.  This is at the low end of the expected range I mentioned last week, which could help explain the market sell-off late last week.  But, it represents a starting point for negotiations with the Democrats.  So, an eventually higher final stimulus figure cannot be ruled out.  Some expect a final bill to be passed in the first week of August.

Hard evidence that the partial re-closings in some states are hurting economic growth could work to push Republicans to accept a larger stimulus package.  Last week's release of the Unemployment Claims data showed the impact of the re-closings.  Jumps in Initial Claims in Florida, Georgia, California and Washington more than accounted for the 109k w/w increase in the total.  Continuing Claims need to rise to show that the increased layoffs in these states are exceeding re-hiring in the labor market.

The uptick in Initial Claims in the latest report will likely feed into the Fed's concerns about the sustainability of strong growth.  While Powell may not mention them specifically in his post-meeting news conference, he will surely re-emphasize the Fed's intention to do what is necessary to support the recovery.

The Claims data and the first print of Q220 Real GDP are the most important US economic data this week.  Another increase in Initial Claims would heighten concern about the sustainability of the recovery.  In contrast, a substantial reversal of last week's jump would alleviate this concern.  In either case, a parallel move in Continuing Claims would add significance.  The consensus estimate of a dip in Initial to 1.400 Mn from 1.416 Mn would probably not be enough of a decline to unwind market concerns, although the direction is consistent with signs that the virus may have peaked in some of the heavily hit states.

Consensus looks for -35.0% (q/q, saar) in Q220 Real GDP.  This is old news, as it is essentially the same as the Atlanta Fed model's forecast.  Also, the bulk of the weakness occurred in the first half of the quarter.  The question is whether this estimate under- or overstates the extent of the recovery that began in the second half.  A higher-than-consensus print would suggest a stronger-than-expected recovery.