The stock market is likely to sustain the rally this week, albeit cautiously, as expectations for key US economic data support the Fed's inclination to downshift rate hikes at the December 13-14 FOMC Meeting. But, they leave open the door for an upward revision in the fund rate's endpoint. Most evidence -- but not all -- supports the m/m direction of the consensus estimates, suggesting stocks will retain an upward bias but cautiously.
This week's data, themselves, may not affect the Fed's Central Tendency forecasts or "dot" chart to be updated at this meeting. This is because the District Bank Presidents probably will have submitted their forecasts before the data are released. The data, nonetheless, will be important by influencing market expectations of future Fed policy.
Consensus looks for a softer November Employment Report. Payrolls are seen slowing to +208k from +261k in October, the Unemployment rising 0.1% pt to 3.8%, and Average Hourly Earnings (AHE) slowing to +0.3% m/m from +0.4%. The AHE trend so far this year is +0.4%. A near-consensus Employment Report would argue for a downshift in rate hikes, but also for further hikes in H123. Payrolls would need to slow further and the Unemployment Rate higher to establish the labor market conditions that would sustain low inflation.
Most of the evidence supports a slowdown in Payrolls and an increase in the Unemployment Rate. The Claims data support these ideas after the latest report showed another jump in Continuing Claims. Also, less-than-normal holiday hiring could depress Retail Jobs. But, Warehouse/Trucking/Courier jobs could bounce, as holiday shopping may have shifted to on-line from brick and mortar sources. The composition of October Retail Sales suggests this could be the case, as does the latest news reports. If holiday-related payroll effects show up in the data, however, they should be discounted. This is because their reversals in January are likely as the post-holiday unwindings don't meet seasonal expectations. Retail Jobs should bounce and Warehouse/Trucking/Courier jobs drop in January. So, weak Retail Jobs or strong Warehouse/Trucking/Courier jobs in November should be discounted.
The consensus estimate of a decline in Job Openings to 10.3 Mn in October from 10.7 Mn in September fits with the view of a softening labor market. But, this estimate is still well above the pre-pandemic 7.0 Mn level. So, the near-consensus print would show excess demand for labor continuing.
Consensus also expects a modest October PCE Deflator, with the Core up 0.3% m/m after +0.5% in September. This is old news, however, as it largely reflects the slowdown already seen in the CPI. The risks are mixed from the the technical differences between the two. The PCE Deflator assigns a smaller weight to Owners' Equivalent Rent, which pushes down the Deflator relative to the CPI. But, Health Services and Airfares are measured differently in the two measures, and they could add to the Deflator rather than subtract as they did in the CPI.
Consensus sees a decline in the Mfg ISM to 49.8 in November from from 50.2 in October, as most manufacturing surveys fell so far this month. Note, however, that consensus also expects an increase in the November Chicago PM, and that survey has done the best job predicting the direction of the Mfg ISM in recent months. A decline in Suppliers' Delivery could be a contributing factor to a fall in the Mfg ISM. But, a lower Suppliers' Delivery would not indicate weak manufacturing. Instead, it would suggest that supply constraints are easing -- good for economic growth and fighting inflation. An easing in supply problems and lessened price pressures were cited in the Markit European PMIs. An easing also was suggested by evidence from the Industrial Production Report, which shows motor vehicle production having continued to climb in October.
The November FOMC Minutes confirmed that the inclination of a number of Participants is to downshift rate hikes "soon." But, they also showed that a number raised their expectation of the endpoint of the tightening cycle. Revised Central Tendencies will be released at the December FOMC Meeting. So, the stock market is not out of the woods yet with regard to near-term monetary policy developments.
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