Stock Market Positives Dominate So Far, But...

The stock market rally should be supported this week by the two positive factors mentioned in last week's blog -- evidence of above-trend growth in Q421 and the announcement of a modest pace of Fed tapering .  The negatives -- higher oil prices and the Democratic tax/spending proposal -- so far have stalled, but they are not out of the picture yet: 

/1/ Although the Democrats hope to vote on the tax/spending/infrastructure bills on Tuesday, this remains to be seen.  And, even if they pass the bills, it could be a non-event.  Not only has the tax/spending bill been pared down, the effects may take time to be seen.  

 /2/ This week's FOMC meeting should be a non-event.  As expected, the Fed will likely announce the start of tapering, putting it at a $15 Bn reduction in asset purchases a month.  Powell will likely be pressed to explain his view on inflation at the post-meeting news conference.  He will probably stick to the idea that much of the recent pickup is temporary although could last longer than had been expected.  But, a spillover to higher wage inflation is problematic (see below) and could be an issue for Fed policy and the market ahead.

 /3/ OPEC ministers are not likely to agree to boost output at its meeting this week.  So, the risk of a renewed run-up in oil prices remains.

This week's US economic data should point to above-trend growth.   The October Mfg ISM, Payrolls and Unemployment Rate are all expected to be strong.

While consensus looks for a dip in the Mfg ISM to 60.5 in October from 61.1 in September, the level would remain historically high.  Moreover, there is some evidence pointing to another increase in the Index.  For example, the Phil Fed Mfg Survey components rose this month.  

Consensus looks for a speedup in Payrolls to +413k m/m in October from +194k in September.  Even Private Payrolls (Total less Government Jobs) are seen up 400k, versus 317k in the prior month.  The Claims data, as well as other evidence, support the idea of a speedup in October Payrolls.

The consensus estimate of a decline in the Unemployment Rate to 4.7% in October from 4.8% in September also is supported by the Claims data.  The Insured Unemployment Rate dropped to 1.7% from 2.1% between the two months' survey weeks.  

The market could get some solace if the consensus estimate of a slowdown in Average Hourly Earnings to +0.4% m/m from +0.6% is right.  The increase would be back to the pace seen from June through August.  But, Labor Costs are becoming more problematic with regard to the inflation outlook.  Last week's release of the Q321 Employment Cost Index showed a speedup even excluding sales commissions.  The ECI Ex Commissions rose 1.1% q/q versus 0.7% in Q221 (which also was the pre-pandemic average).