This Week's Key US Economic Data

The stock market should continue to trend higher this week, as key US economic data are expected to show slower inflation and modest growth.  Although Fed Chair Powell and other Fed officials are slated to speak this week, they are not likely to say anything new.  Most importantly, monetary policy remains on hold.  And, the recent softness in labor market data supports expectations of steady policy for now while leaving open the possibility of rate cuts at some point ahead.

Consensus expects the Total and Core CPI to slow to +0.3% m/m in April from +0.4% in March.  The y/y would slip for both.  However, Total risks printing higher than consensus, boosted by the jump in gasoline prices.  Nevertheless, with gasoline prices stabilizing so far in May, a higher-than-consensus Total will likely be ignored by the markets.  The estimate for Core looks reasonable.  A smaller-than-consensus increase in Core may require a slowdown in Owners' Equivalent Rent to 0.3% from 0.4% and a pause in the sharp upward pace of Motor Vehicle Insurance.  Both would seem to be long shots. 

The other inflation news this week is the April PPI.  Consensus looks for +0.2% m/m for both Total and Core, which would be the same prints as in March.  These would be neutral prints for the markets.

Other key data this week are expected to show a sharp slowdown in Retail Sales in April after they popped in March.  Consensus looks for Total to slow to +0.4% m/m from +0.7% and Ex Auto to slow to +0.2% from +1.1%.  Unless March sales are revised down a lot, consumer spending would still have a solid upward trajectory at the start of Q224.  An issue will be the extent of the consumer's strength.   The Atlanta Fed model's latest estimate of 4.2% Real GDP Growth (q/q, saar) for Q224 has consumer spending up 3.9%.  There is not enough data released so far to attach much reliability to these projections. 

The market may pay attention to the extent to which Housing Starts rebound in April from their March drop.  Consensus sees +6.7% m/m after -14.7% in March.  This would put the level of April Housing Starts at 1.41 Mn units, essentially equal to the Q124 average (1.42 Mn) -- suggesting a flattish underlying trend in residential construction.  The Atlanta Fed model estimates a slight increase in Q224. 

The manufacturing sector was also up modestly in April, according to the consensus estimate of Industrial Production (IP).  Consensus expects +0.2% m/m, after +0.4% in both February and March.   IP (as well as Manufacturing Output) was flat over the 12 months ending in March. 

   

 

Friendly Developments for Stocks

The stock market should continue to be buoyed by the Fed-friendly implications of the April Employment Report this week.  And, in a subtle way, it should continue to be buoyed by Fed Chair Powell's comments, as well.  Powell appears reluctant to harm economic growth to fight inflation, which is a positive for the market's longer-term outlook.

In his post-FOMC news conference, Powell discussed what might bring down inflation without a recession.  He mentioned the lagged methodology by which Owners' Equivalent Rent (OER)  is calculated, saying that OER has not caught up to the flattening seen in private surveys.  His comment suggests that he sees the slow progress toward achieving the Fed's 2% inflation target more as technical rather than a fundamental problem.  Thus, he seems reluctant to aim at economic growth to fight inflation --  a positive for stocks.  Although he did not dismiss the Q124 high inflation prints as resulting from temporary factors, they, in fact, did reflect special factors, such as start-of-year price hikes and lagged pass-through of earlier price increases.  They overstated the underlying trend.  He probably realizes this, but had already rejected the idea of "exing-out" undesirable parts of a figure in past news conferences. 

The April Employment Report is not an all-clear for the Fed, however, so the markets should remain focused on upcoming US economic data for clues on the course of monetary policy.  To be sure, the Report points to continued modest economic growth in Q224.  From one measure, Total Hours Worked (THW) suggest about 2.0% Real GDP Growth for Q224, not that much different from the 1.6% in Q124.  THW stands 1.4% (annualized) above the Q124 average, just a little higher than the 0.9% (q/q, saar) in Q124.   From another measure, the uptick in the Unemployment Rate to 3.9% argues for a sub-2.0% GDP increase in Q224, as the Rate exceeds the 3.8% Q124 average and thus suggests below-trend growth.  The downtick in the Nonfarm Workweek suggests the post-winter bounce-back already has abated.  All these implications suggest the financial markets don't have to work as hard as otherwise to achieve non-inflationary growth.

The slowdown in Average Hourly Earnings to 0.2% m/m is good news for the Fed's anti-inflation fight.  However, it is too soon to give an all-clear for wage inflation, as the slowdown was not widespread.  Only 5 of the 13 sectors had wage increases of 0.2% or less.  The 3-month averages of about half of the sectors were 0.3% or less,