What If There is No Fiscal Stimlus?

The stock market will have to navigate through a number of events this week, including possible fiscal stimulus bill, an FOMC Meeting, continuing Brexit negotiations, start of the vaccine in the midst of renewed shutdowns, inclusion of Tesla in the S&P 500 Index, quarterly witching  expiration of options and futures, and US economic data.  There are reasons to think that any hit to the market from them will be contained.

This week should see some sort of conclusion regarding passage of  a fiscal stimulus bill this year.  Passage is far from certain and may not be known until the end of the week as Democrats and Republicans play "hardball."  Interestingly, Fed staff discussed the economic implications of no passage at the November FOMC Meeting.  The implications are not as dire as one might think from news accounts.  Here is what the Meeting's Minutes say:

1.  Although this lack of additional fiscal support was expected to cause significant hardships for a number of households, the staff now assessed that the savings cushion accumulated by other households would be enough to allow total consumption to be largely maintained through year-end. 

 2.  Recent data on tax receipts also suggested that the fiscal positions of states and localities had deteriorated less than expected, which led the staff to boost the projected path of state and local government purchases. [Note the improved financial positions may explain the flattening in State Payrolls in November.]

3.  In the staff’s medium-term projection, the assumption that significant additional fiscal support would not be enacted pointed to a lower trajectory for aggregate demand going forward.

 4.  [However,] with monetary policy assumed to remain highly accommodative and social-distancing measures expected to ease further, the staff continued to project that real GDP over the medium term would outpace potential, leading to a considerable further decline in the unemployment rate.  

 5. The resulting take-up of economic slack was in turn expected to cause inflation to increase gradually, and the inflation rate was projected to moderately overshoot 2 percent for some time in the years beyond 2023 as monetary policy remained accommodative.  

The Fed staff's projection assumed that social-distancing measures would ease further.  This development, however, is not happening.  So, unless this changes as vaccines are rolled out, there is downside risk to its medium-term forecast. And, this could prompt the FOMC to expand its asset purchase program at this week's meeting -- a positive for the stock market.

The latest Claims data show the renewed shutdowns are having an impact.   The +137k rebound in Initial Claims to 853k probably reflects /1/ a post-holiday rebound to above trend and /2/ layoffs stemming from the resurgence of the virus. Each factor may have accounted for about half of the 137k w/w bounce.  Initial Claims could fall in this week's report, as the post-holiday rebound unwinds.  An unwinding would subtract about 35k from Initial.   Whether Initial falls will depend on whether virus-related new layoffs speed up further.

Consensus apparently expects the renewed shutdowns to weigh on other data, for November, due this week.   Retail Sales are expected to fall 0.3% m/m, with Ex Auto slowing to +0.1%.  Industrial Production is seen slowing to +0.3% m/m from +1.1%.   And, December business surveys -- Market Mfg PMI and Phil Fed Mfg Index -- are expected to slip.  Consensus looks for flat November Housing Starts.