Slowdown Coming (Here)?

The stock market should be helped by a low print of the Fed's targeted inflation figure this week. Nevertheless,  evidence pointing to slower growth is accumulating, with mixed implications for the market.  Although slower growth is a negative for corporate profits, it, along with low inflation, would give the Fed a reason to cut rates.  These two conflicting implications could keep the stock market in a range this summer -- perhaps until it is clear that the Fed will cut rates.  The question remains whether the slowdown is just a temporary unwinding of the post-winter bounce seen in March or whether it is the start of a prolonged period of soft growth.  

Consensus looks for 0.0% m/m Total and +0.1% Core PCE Deflator for May.  A flat Core can't be ruled out.  It would be the fourth month out of the past five when the Core rose by less than it did in the corresponding month of 2023.

The broadest measure of the economy among high-frequency data -- Unemployment Claims -- is blinking "yellow."  Both Initial and Continuing Claims exceeded the May average in the past two weeks.  The higher level does not appear so much above May to signal serious weakness.  And, with strong hiring by the health/social assistance  sector and state/local government, it's not clear that it signals a sharp slowdown in June Payrolls.  However, it raises the possibility that overall economic activity is slowing to below the long-run trend.

The flattish pace of Retail Sales over April and May could be just the typical pause after a strong month (March).  However, along with the downward revision in March Retail Sales, the Q224 increase in Consumer Spending could be lower than the Atlanta Fed model's estimate of +2.5% (q/q, saar) and possibly lower than the 2.0% seen in Q124.  Evidence of such a slowdown in Friday's May Personal Income Report could prompt downward revisions of Q224 Real GDP Growth among Street forecasters as well as the Atlanta Fed model's 3.0% estimate.  

Last week's May Housing Starts Report showed a pullback in this sector.  The decline in Permits suggests a  counter-consensus decline in May New Home Sales, due Wednesday.   Both are derived from the same sample.

Although the June Markit rose for the second month in a row in June, other business surveys remained soft so far.  Manufacturing Output bounced in May after two months of decline.  It remains to be seen whether the May bounce-back will persist or unwind, like a similar bounce did in March.

Away from the data, the broad measures of commodity prices have stalled since March, trading in a flat range.  This remains the case so far in June, suggesting the softening in the US economy is continuing.  At the same time, the flat trend does not suggest recession.