A Second Life for Fiscal Stimulus?

The stock market should continue to benefit from expectations of additional fiscal stimulus in the next few weeks.  On Friday, Trump shifted his position, agreeing to provide funds to state & local governments as well as stimulus checks to families.  These actions would likely push the entire fiscal stimulus action, including the $400 additional unemployment benefit, toward the $2 Tn Democratic goal. It is not certain that Democrats and Republicans will resolve their differences, but the possibility remains while Congress is in recess until early September.

Ironically, the additional fiscal stimulus will hit when the economy already is bouncing back sharply.   The Atlanta Fed Model's estimate of Q320 Real GDP Growth moved up to 26.2% (q/q, saar) from 20.5% after the release of July Retail Sales.  Real Consumer Spending is now projected at 27.8% for this quarter.  This estimate is probably still too low.  So, the risk remains that the Q320 model's GDP projection will be raised further as more data come in.  The next model update is August 18.

This week's US economic data calendar is light, with housing data and a couple of manufacturing surveys on tap.  Consensus looks for sizable increases in July Housing Starts and Existing Home Sales, which seem reasonable.  Consensus sees a decline in the August Phil Fed Mfg Index to 20.5 from 24.1 in July but an increase in the Markit Mfg PMI to 51.8 from 50.9.  The risk is for the Phil Fed Mfg Index to rise, after its July decline ran counter to the Mfg ISM.

The weekly Claims data should be the most important release.  It will be of interest whether the renewed, albeit lower, additional payment will induce more people to apply for regular benefits -- and thus lift Initial Claims.  Last week's sub-1 Mn print for Initial Claims made either or both of two points -- /1/ labor market conditions continue to improve as the economy returns to normal and/or /2/ fewer unemployed people bothered to file for the regular insurance program if they could not also receive the $600 additional assistance.  Arguing for the first point is that labor market conditions should improve sharply if the economy is growing well above trend -- which it is.

The strength of the snapback raises some inflation fears.  The longer-term 5-year inflation expectations component of the University of Michigan Consumer Sentiment Survey is up to 2.7% -- above the 2.3-2.5% range seen prior to the virus.  Some of these concerns are probably overdone.  Much of the 0.6% m/m speedup in the July Core CPI appears to be a one-off reversal of the shutdown-related price cuts.  But, the weaker dollar could be having an effect, as well.  Non-Auto Consumer Goods Imports Prices rose an above-trend 0.2% m/m in June and July.   They fell 0.2% over the 12 months ending in July.