The stock market has to contend with speeches by Fed Chair Powell and other Fed officials this week, in which they will likely continue to threaten further rate hikes ahead. Their emphasis on more hikes makes for a high hurdle to prevent one at the next FOMC Meeting. Indeed, last week's US economic data-- Unemployment Claims and Housing data -- were not soft enough to argue for another pause. This week's calendar contains the important May PCE Deflator, which risks printing softer than consensus. However, a soft print is probably not enough to stop the Fed from hiking in July. An extremely weak June Employment Report may be required, as well.
Consensus expects +0.4% m/m for the May Core PCE Deflator -- the same as the increase seen in the Core CPI. This estimate risks being too high for reasons mentioned in last week's blog. In particular, a jump in Used Car Prices accounted for more than 0.1% pt of the Core CPI's increase. Used Car Prices, however, do not enter the PCE Deflator significantly. A low Core PCE Deflator print, by itself, would probably not be enough to dissuade the Fed from tightening, as a one-month print is not a trend. Moreover, a 0.3% print still would be above the Fed's target.
The Fed will probably need to see signs that a recession has begun. Data released so far don't say this. The Unemployment Claims data say the labor market has weakened, but the weakness is not snowballing. Initial Claims stayed high in the latest week, but unchanged from the prior week. Despite the high level of layoffs, Continuing Claims fell. The latter suggests hiring remains strong. To be sure, the Claims data still point to a slowdown in June Payrolls (one more week's data is needed for a complete picture). However, they do not hint at a sub-100k print, which is what may be needed to get the Fed to consider pausing.
Last week's Housing Starts/Permits data clashed with Fed Chair Powell's depiction of the housing sector as being hurt by past rate hikes. His depiction may be rear-view. The increases in May Starts and Permits -- both for 1-Families and Multis -- raised the possibility that the impact of past rate hikes on this sector is no longer dominant. Underlying factors, such as population growth and household formation, may be reasserting themselves in housing demand. While the Starts/Permits jumps may be one-off in terms of magnitude, 1-Family Starts have now risen in each month since February.
The manufacturing sector also may not be as weak as some surveys suggest. The decline in the Markit US Mfg PMI to 46.3 in June may be just catch-up to the levels seen in the Mfg ISM in prior months. Evidence for the June Mfg ISM so far is mixed. Hard evidence regarding manufacturing will be seen in this week's report on May Durable Goods Orders. Consensus looks for -1.0% m/m for Total, but this is just an unwinding of the +1.1% jump in April. Ex Transportation Orders are seen slipping 0.2%, which would just extend a modest descent similar to the -0.1% in April. The Fed's Industrial Production Report shows Manufacturing Output up 2.4% (saar) in April-May over Q123 -- clearly not a sign of recession in this sector.
Overall, the Atlanta Fed model's estimate of Q223 Real GDP Growth is now 1.9% -- in line with the long-term trend estimated by the Fed.
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