FOMC Minutes and Data Should Not Derail Stock Rally

The stock market should rally further this week, now that the low July CPI undercut fears of very aggressive Fed tightening ahead.  This week's US economic data will likely sustain expectations of a 50-75 BP hike at the September FOMC Meeting rather than the possibility of 75-100 BPs that was raised by the strong July Employment Report.  Moreover, the data should be more consistent with a slowdown than recession.

The release of the July FOMC Minutes on Wednesday should reaffirm the Fed's commitment to bringing down inflation to its 2% target.  The Minutes will probably be vague on the magnitude of the next rate hike, as was Powell at his news conference.  He had indicated that future Fed policy would be data-dependent and not constrained by forward guidance.  What may be important would be if the Minutes reiterated the Fed view that a recession is not its most likely expectation.  It would suggest the Fed will be measured in its tightening path, trying to avoid a sharp move that could lead to an abrupt downturn in the economy.

Whether the Fed will succeed in achieving  a "soft landing," and thus avoid recession, remains to be seen.  The July CPI was held down by a number of "special" factors, such as the drop in gasoline prices and airfares, that might last for only a few months.  High wage inflation is still a problem that could keep price inflation above the Fed's target after these special factors flatten out.  The possible need for a recession to bring down wage inflation has not gone away, but it is not imminent.

This week's US economic data are expected to point to slow growth in Q322.  Consensus looks for a slight 0.1% m/m increase in July Retail Sales, with Ex Auto 0.0%.  The low prints largely reflect the drop in gasoline prices.  So,  it will be important to look at Ex Auto/Ex Gasoline Retail Sales.  It could very well slow from the strong 0.7% June gain --  but this could be explained as the typical pattern after a strong month.  To be sure, higher prices will boost food sales, which are in Ex Auto/Ex Gasoline.

Consensus risks being too low in its forecast of +0.3% m/m July Industrial Production, with Manufacturing Output 0.0%.  Total Hours Worked in Manufacturing point to an increase in the latter.  This would be important, since the output declines in the prior two months were hinting at recession -- their being one of the pieces of evidence used to date business cycle turns.   Other positive manufacturing evidence would be seen if consensus is right that the Phil Fed Mfg Index will move up to -5 in August from -12.3 in July.  A rebound in the Phil Fed Index is the risk, as it appeared to be too low relative to the Mfg ISM in July.

Some of this week's Housing data are expected to stabilize.  The rate of decline is expected to ease for July Housing Starts.  Consensus looks for -1.2% m/m versus -2.0% in June -- and a stronger print can't be ruled out given the revised uptick in June Housing Permits.  The August Homebuilder Index is seen at a steady 55.  But, July Housing Permits are expected to decline.