Potentially Market-Positive Developments

Although the stock market will still face potentially negative issues after quarter-end, as enumerated in my prior blog, two potentially positive developments -- fiscal stimulus and a vaccine -- appear to be more promising than a couple of weeks ago.  Another round of fiscal stimulus would have a more immediate impact on the economy, so it is likely the more important of the two in terms of the stock market's near-term prospects.  Additional fiscal stimulus can be justified even if US economic data continue to point to above-trend growth.  The huge amount of slack in the labor market means growth should be even stronger.

The potential for a fiscal stimulus compromise between Democrats and Republicans may have implications for the market reaction to strong or weak US economic data.  The stock market could react positively to slowing evidence to the extent it is seen leading Republicans to accept a higher stimulus amount than their announced $1.3 Tn proposal.  The market also could get a lift from strengthening evidence if it is seen pushing Democrats to lower than $2.4 Tn proposal.  Very weak data still should be a market negative as it would suggest a dire consequence of no additional fiscal stimulus.  Very strong data could be a positive for the opposite reason.  

This week's US economic data will likely keep open the door for a stimulus package compromise but not necessarily narrow the gap between the proposals.  Consensus looks for the September Mfg ISM to edge up to 56.2 from 56.0.  This would be smallest m/m increase since the recovery began in May, arguing for more stimulus.  But, it would be a high level, confirming a widespread recovery in the sector.  Evidence from the Markit Mfg PMI and components of Phil Fed Mfg Survey point to an uptick.  Note, however, there is some downside risk from the possibility that the pullback in motor vehicle assemblies in August gets captured by the September Mfg ISM.  

Consensus expects September Nonfarm Payrolls to slow to +913k m/m from +1.027 Mn in August, again in a direction favoring more stimulus but a pace that is historically still very strong.  There is some evidence for a September slowdown in Payrolls.  Census workers fell by 41k between the August and September Survey Weeks.  And, the decline in Continuing Claims between months slowed, suggesting net hiring in the private sector slowed, as well.  One piece of evidence that suggests a speedup is the 3.8 Mn surge in Civilian Employment in August as shown in the Household Survey, which did not show up in Payroll that month.  Will it appear in September Payrolls?  Not necessarily.  There could be a number of technical reasons for the difference between Civilian Employment and Payrolls.  And, other recent months have shown divergences too that were not offset in the subsequent month.  So, it represents only a risk, and not a particularly reliable one.

Consensus looks for a dip in the Civilian Unemployment Rate to 8.2% in September from 8.4% in August.  Here, the risk is for a larger decline.  The Insured Unemployment Rate fell by 1.3% pts m/m in September.  The Civilian Unemployment Rate fell by more than the Insured Rate in 2 of the past 3 months.    To be sure, there is also a risk that Civilian Employment could unwind part of its 3.8 Mn surge in August, which would limit the decline in the Unemployment Rate if not boost it.  A still high Unemployment Rate could encourage a fiscal stimulus compromise.