Stocks In An Uptrend

The stock market is likely to stay in an uptrend this week, helped by soft inflation data.  Other US economic data are expected to be mixed, but on balance point to modest economic growth in Q423.  The combination of low inflation and modest growth should sustain expectations of steady Fed ahead in the near future.  Powell's speech this week should not disabuse these expectations.  Month-end buying and hope for a "Santa Claus" rally in December could help the stock market this week, as well.

With the Israel/Hamas hostage deal lifting hope that the Middle East will soon return to normalcy, risk premiums in the markets could subside.  However, one of the reduced risk premiums appears to be in a weaker dollar in the FX market.  The latter also could reflect a reduced fear of Fed tightening.  Nevertheless, a weaker dollar could become a problem for the Fed next year.  First, a weaker dollar boosts US exports and import substitution -- helping to lift economic growth.  Second, it boosts import prices and thus inflation.  Right now, the weaker dollar is not a dominant concern in the stock and Treasury markets.  However, it is important to keep an eye out for how it behaves ahead.

The most important US economic data this week is the October PCE Deflator.   Consensus looks for +0.1% m/m Total and +0.2% Core, in line with the soft CPI already reported.  The y/y is expected to fall for both, although staying above 3.0%.  This would be welcome news for the Fed.  But, officials have said one, or even a few, low prints would not be enough to end the tightening policy bias.

Another important data are Unemployment Claims.  They are expected to rebound somewhat after dropping in the prior week.  The latter changed their implications for the November Employment Report, no longer suggesting a further slowdown in Payrolls.  However, seasonal adjustment of the Claims data is not reliable in this holiday season.  So, they may be less useful in providing clues about the monthly jobs data.

Other US economic data are expected to be mixed.  October New Home Sales are expected to dip and Consumer Spending to slow.  An expected decline in the November Conference Board Consumer Confidence Index would underscore a softening consumer, as well.  But, the November Mfg ISM is expected to tick up, although remain sub-50.  And, October Construction Spending is expected to remain in an uptrend, reflecting the recent increase in Housing Starts and strength in non-residential building. 

Stocks Helped by Holiday Shopping

The stock market is likely to continue to move up in this Thanksgiving week.  Although US economic data releases will be few, news reports regarding holiday sales and price discounting should underscore expectations that the economy will avoid recession and that inflation will fall further.  The consumer is expected to remain solid in this holiday season, helping to prevent recession.  And, large price discounting may be highlighted.  To be sure, high-frequency data -- Unemployment Claims and commodity prices -- suggest the US economy already is slowing.  

Surveys, such as one conducted by Deloitte and National Federation of Retailers (NFR), suggest holiday spending will remain robust.  NFR estimates holiday sales will increase 3-4% y/y.  Deloitte sees average spending per person exceeding the pre-pandemic level for the first time.  However, spending on heavily discounted items, such as those offered on Black Friday and Cyber Monday, is expected to be more prevalent than in 2022.  Deep discount promotions would help hold down the CPI.   

A still solid consumer would mitigate fears of recession, even as the economy slows.   The labor market already appears to be weakening.  Unemployment Claims moved up in early November and suggest that not only have layoffs increased but hiring has slowed.  If these trends continues over the next couple of weeks, it will point to an even weaker Employment for November than October's (adjusting for the impact of strikers -- subtracting in October and adding in November).  

Commodity prices also continue to point to softening economic activity.   Some major indices -- CRB and S&P GSCI -- have fallen further in November.  Others -- SSE Consumer Commodity Index -- flattened out after falling in October.  

With these weak high-frequency indicators flashing soft economic activity, the Atlanta Fed model's early estimate of 2.0% (q/q, saar) for Q423 Real GDP seems too high.  This estimate is near trend and inconsistent with the increase in the Unemployment Rate seen in September and October.  The model's estimate risks moving down as more data become available.   

Stock Rally To Survive This Week's Economic Data and Events?

The stock market rally will probably survive this week's key US economic data if the data print as consensus expects.  And, more market-friendly prints than consensus estimates can't be ruled out.  The November 17 Federal Budget deadline could present a problem, but how it will be resolved remains an open question.  Moody's downgrade of the US may spur some fiscally conservative decisions regarding the budget. If it looks like the Democratic proposal to expand social programs will not pass, the outcome could be a market positive even if the government shuts down for a few days.

Fed Chair Powell scared the markets last week by keeping the possibility of renewed tightening on the table.  He stipulated that the Fed needs to see solid evidence of a downtrend in inflation to end the tightening cycle.  He said this would take more than just a few months of low inflation prints.  From an economist's perspective, what will likely be needed to mollify the Fed is a significant weakening in GDP growth and a large increase in labor market slack.  An overshooting to the downside in economic growth may be needed to establish the conditions for good, non-inflationary economic growth ahead.  An overshoot could be problematic for the stock market at some point.

There already is evidence that economic growth is slowing and the labor market loosening up.  Unemployment Claims have moved up in the past couple of weeks.  If they stay at these levels in the next few weeks, they would point to another slowdown in November Nonfarm Payrolls and possibly a higher Unemployment Rate.  The renewed softening in commodity prices also attests to a slowing economy.  

This week's release of October Retail Sales and Industrial Production are expected to be soft.  Although a slowdown in Retail Sales could be just the typical pause after a strong month and a decline in Industrial Production could reflect in part the auto strike, near-consensus prints may very well be positives for the markets.  They would support the idea that the Fed may get the slowdown it wants.

If signs of a slowdown accumulate, the markets could view still-high inflation data as temporary.   Consensus looks for a benign Total but still-high Core CPI for October.  Total is seen at +0.1% m/m and Core at +0.3% (same as in September).  A 0.2% Total or a 0.2% Core can't be ruled out.  The latter would likely be a big positive for the stock market, while a consensus print for Core could be a small negative.

 

Further Stock Market Rally On The Favorable US Economic Data

The stock market should continue to climb in response to last week's favorable US economic data.  The data point to slower economic growth in Q423 and subdued wage inflation.  They support the idea that the Fed's rate hiking cycle is over.  As a result, concerns about the Fed are on the back burner for now, so that Fed Chair Powell's speech this week, which should repeat what he said at the post-FOMC news conference, will likely have little market impact.  Moreover, strong demand at this week's Treasury auctions of longer-dated securities -- reflecting the more subdued outlook for Fed policy -- could help lift stocks.

The October Employment Report is good news for the Fed and markets.  It points to slower growth in Q423 and reduced labor market pressures (including wages). 

The Report contains a number of signs that economic growth is slowing.  /1/ The +150k m/m increase in October Payrolls (+185k excluding strikers) was below this year's trend (+249k).  /2/ The Nonfarm Workweek slipped to 34.3 Hours, putting it below the 34.4 Q323 average.  /3/ Total Hours Worked (THW) fell 0.3% m/m, putting the October level flat relative to the Q323 Average.  In contrast, THW rose 1.4% (q/q, saar) in Q323.  /4/ The uptick in the Unemployment Rate to 3.9% put it at the upper end of the Fed's Central Tendency forecast of 3.7-3.9% for Q423.

The Report suggests that wage inflation remains in check.  The 0.2% m/m increase in Average Hourly Earnings shows a broad-based acceptable pace among sectors -- that is, a pace consistent with the Fed's 2% price inflation target, taking account of trend productivity growth.  Ten of the thirteen sectors had an increase of 0.3% or less in both October and the 3-month average.  This is better than September's seven of thirteen sectors with an acceptable pace of wage increase. 

Looking ahead,  the October CPI, due November 14, may not fully be in line with the Fed's goal.  The Total should print below September's +0.4%,  thanks to the decline in gasoline prices.   However, it is not clear whether the Core CPI will slow from September's +0.3%.  Nevertheless, a modestly high print may be ignored by the market, given the signs of a slowing economy.