The stock market should continue to see strong US economic data this week and possibly good news on the virus front, pushing against fears of renewed weakness -- the latter epitomized by the Fed staff's forecast presented at the July FOMC Meeting. Risks to the outlook will probably be repeated by Fed Chair Powell in his speech at the Jackson Hole Conference this week. In contrast, the Republican Convention could cushion these fears if the speakers emphasize a pro-growth agenda.
The Fed staff laid out several reasons why they lowered their GDP forecast for H220 -- even as they raised their estimate of Q220 GDP in response to data that came in stronger than they had expected:
"Although the staff assumed additional fiscal stimulus measures would be enacted beyond those anticipated in the June forecast, the positive effect on the economic outlook was outweighed somewhat by the staff's assessment of the likely effects of several other factors. Those factors included the increasing spread of the coronavirus in the US since mid-June; the reactions of many states and localities in slowing or scaling back the reopening of their economies, especially for businesses , such as restaurants and bars, providing services that entail personal interactions; and some high-frequency indicators that pointed to a deceleration in economic activity."
Until there is hard evidence that these concerns will be realized, the Fed's forecast perhaps should best be viewed as a reason to expect continuing extremely easy monetary policy. The Fed's Central Tendency forecast at the June FOMC Meeting was for -7.6% to -5.5% for 2020 Real GDP Growth (Q4/Q4). This forecast is too weak if Q320 Real GDP Growth comes in 25+%, as the Atlanta Fed model now projects. The Central Tendencies will be revised at the FOMC Meeting on September 15-16.
Many data released so far for July indeed moderated from the extremely strong pace seen in June. But, their July gains were still strong. The few pieces of August data are mixed. For example, the Phil Fed Mfg Index slipped, although the survey's components rose (the Index is not based on the survey's components). The Markit Mfg PMI climbed further above 50, as did the Services PMI. Initial Claims rebounded in the latest week, but did not fully offset the prior week's drop. Initial Claims need to move more significantly higher to confirm a noticeable renewed softening in overall labor market conditions. Consensus looks for them to decline in this coming week's report, however. At this point, the Claims data suggest a speedup in August Payrolls.
Other data this week are expected to post gains. These include July New Home Sales and Durable Goods Orders as well as August Chicago PM and University of Michigan Consumer Sentiment. Q220 Real GDP is expected to be revised up slightly.
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