The stock market is not out of the woods yet, but a summer rally is possible. The market has two hurdles to get past over the next few weeks -- the June CPI and Q222 corporate earnings. Another high CPI is expected, but the market could dismiss it now that oil and gasoline prices have moved down. Corporate earnings are seen slowing. Whether the Fed hikes by 50 or 75 BPs at the July 26-27 FOMC Meeting remains an open question.
Consensus looks for another high CPI in June. Total is seen at +1.0%
m/m and Core at +0.6%. The jump in gasoline prices accounts for most
of the difference between Total and Core. But, gasoline prices have
fallen in early July, which should hold down the next CPI print.
Owners' Equivalent Rent and Airfares should be the main culprits behind
the jump in Core, as they were in recent months. The drop in oil prices
could help to hold down airfares and other prices ahead, however. So a high Core print could be dismissed, as well.
Macroeconomic evidence supports the consensus expectation of a slowdown
in Q222 Corporate Earnings for the S&P 500 (see table below). Consensus looks for
about +5.0% (y/y), versus about 11.5% in Q122. In Q22, economic growth
slowed on a y/y basis, as did the ascent in oil prices. Also, earnings
from abroad should be hurt by weakening growth in Europe and China as
well as the stronger dollar. And, it looks like profit margins may have
contracted, with the Core CPI expected to slow by more than Average
Hourly Earnings.
The June Employment Report did not resolve the question regarding the Fed's next move. It points to a moderation in economic growth and constrained wage inflation, but it also shows a strong, broad-based labor market. Despite the Payroll strength, Total Hours Worked (THW) slowed to 2.7% (q/q, saar) in Q222 from 3.5% in Q122, because the Average Nonfarm Workweek slipped. As for wage inflation, the moderate 0.3% m/m increase in Average Hourly Earnings (AHE) remained within the range seen since March. So, both THW and AHE argue for a downshift in Fed tightening to 50 BPs.
But, the Report contained broad-based evidence that the labor market is solid and has fully recovered from the pandemic. The most striking result from the Household Survey is the drop in the broadest measure of labor market slack -- U-6. It fell 0.4% pt to 6.7%, possibly an all-time low for this measure. The Survey's decline in Civilian Employment and Labor Force could reflect the particulars of the relatively small sample, although they can be leading indicators of a slowdown in Payrolls. The small-sample effects drop out in the calculation of the Unemployment Rate. The Rate slipped on an un-rounded basis, rounding to 3.6% in both May and June. The labor market's strength gives hawks an argument for hiking by 75 BPs.
Perhaps the most important US economic data for the Fed this week will be the Mid-July University of Michigan's 5-Year Inflation Expectations measure on Friday. Remember that this measure unwound a mid-month jump in June to end the month at a near-trend 3.1%. It will be an important positive for the Fed and markets if these expectations stay at this level or move lower.
Three cyclically-related data will be released Friday, as well. They risk being mixed. /1/ Consensus looks for a speedup in June Retail Sales. But, much of the increase could be price-related. /2/ Consensus also sees the Mid-July Consumer Sentiment Index falling further. But the risk is for an increase as consumers react positively to the decline in gasoline prices. /3/ Consensus expects a 0.1% m/m uptick in June Industrial Production, with Manufacturing Output flat. But, the risk is for weaker prints, based on Total Hours Worked in the Manufacturing Sector. .
Macroeconomic Evidence Regarding Corporate Earnings
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q119 3.2 -12.8 +7.9
3.2 2.1 51.9
Q219 2.7
-12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
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