The stock market may take a breather this week, as it digests recent gains and handles key US economic data. Consensus estimates of the latter are consistent with the idea of moderate growth and contained wage inflation, but not necessarily soft enough to convince the Fed to cut rates. Nevertheless, Friday's Personal Income/PCE Deflator Report kept open the possibility of a September rate cut, so any market pullback is likely to be mild and temporary. Meanwhile, macro evidence raises doubt about the robustness of the consensus estimate of Q224 corporate earnings, soon to be released.
Consensus looks for the June Employment Report to show a slowdown in Payrolls from May's large gain, along with steady 4.0% Unemployment Rate and a reversion to a 0.3% m/m trend in Average Hourly Earnings. The +180k m/m estimate for Nonfarm Payrolls, versus +272k in May, remains well above the near-100k pace that is consistent with labor force growth. Nevertheless, it would be in line with other evidence pointing to slower economic growth. The Q224 average would be 206k m/m, below the 267k average in Q124 and 251k in 2023. A steady 4.0% Unemployment Rate would keep it above the 3.8% Q124 average. Unemployment Claims data support the idea of slower Payroll growth in June. However, their increase last month was only modest, and hiring by Health Care/Social Services and State/Local Governments likely need to soften, as well, to bring the Payroll gain below 200k.
The consensus estimate of an uptick in the Mfg ISM to 49.0 in July from 48.7 in June would likely be favorably viewed by the stock market, as it would argue against the risk of recession. It still would be low enough to sustain Fed officials' views of a developing economic slowdown. The Q124 average is 49.1.
The May Personal Income Report was good news for the Fed, showing both slower inflation and consumption growth. May Real Consumption is 1.7% (annualized) above the Q124 average, pointing to a sub-2.0% Consumption Growth for the second quarter in a row. The Core PCE Deflator was below the pace in the corresponding month of 2023 in 4 of the 5 months so far this year. Indeed, the Market-Based Core PCE Deflator has printed 0.1-0.2% m/m in 6 of the past 8 months, with its y/y now down to 2.4%. The Fed is very close to hitting its 2.0% inflation target according to this measure!
Consensus looks for about 9.0% (y/y) increase in Q224 S&P 500 corporate earnings, better than the 6.0% in Q124. The macro evidence is not as optimistic. Although Real GDP Growth is expected to speed up a bit, based on the Atlanta Fed model's current estimate for Q224, other factors are less supportive. Oil prices slowed, the dollar strengthened (making earnings abroad smaller), and economic activity abroad softened (although stronger than a year ago). Profit margins look little changed, as both prices and wages slowed similarly.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q123 1.9 -19.5 +3.0 4.5 5.5 47.9
Q223 2.4 -32.0 +0.5 4.4 5.2 44.7
Q323 2.9 -12.0 -2.5 4.3 4.4 43.2
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