Stock Market Consolidation?

The stock market may consolidate over the next two weeks, as there are few scheduled US economic data releases and caution could prevail before the April PCE Deflator at month end.  Data released so far point to modest economic growth and slowing but still high inflation.  The combination should keep Fed policy on hold, likely to be reiterated in this week's speeches by Fed officials and the FOMC Minutes.  

The two most important US economic data releases over the following couple of weeks should be the April PCE Deflator (due May 31) and May Employment Report (due June 7).  They risk confirming still-high inflation and slow economic growth.  The fear of a still-high PCE Deflator could weigh on the stock market through the rest of May.  A soft Employment Report could re-ignite the market rally.

The Total and Core PCE Deflator may very well print  0.3% m/m for the third consecutive month -- too high from the Fed's perspective and contrary to the tendency of the PCE Deflator to print below the CPI.  Besides rent, the 1.2% m/m jump in apparel prices may be the culprit this month.  It has a fairly high weight in the PCE Deflator, so could tilt the Core up significantly.  The apparel price jump is surprising given the strength of the dollar.  And, import prices show a flattish trend in these prices.   Conceivably, the early timing of Easter could have distorted seasonal adjustment.  If so, apparel prices should fall in May. 

The May Employment Report is likely to show another month of modest job growth.  The Claims data show both Initial and Continuing exceeding their April levels so far in May.  A couple of more weeks' data are needed to confirm this labor market softening.

The latest data show softening in at least two major sectors of the economy -- housing and manufacturing.  Although Housing Starts rebounded, they did not fully recover from March's drop.  Also, the bounce was in multi-families, while the more important 1-family component continued to slip.  And, Building Permits fell for the second month in a row.  Manufacturing Output fell in April, declining for two straight months excluding high tech and motor vehicle production.   High tech output has been an uptrend this year, while motor vehicle assemblies fell back to the Q124 average in April.  From the demand side, consumer spending looks like it should slow in Q224.   The decline in April Ex Auto/Ex Gasoline Retail Sales just partly offset the March jump, so the April level is 1.5% (annualized) above the Q124 average.  Nevertheless, continued sluggish sales in May and June should keep the Q224 pace below the 3.4% Q124 pace.