More Downward Pressure on Stocks?

The stock market could remain under pressure from this week's US economic data, but not necessarily as the risks favor friendly prints.  The week's two key pieces of US economic data are the June PCE Deflator and the first-print of Q224 Real GDP.  The consensus estimate of the PCE Deflator is not entirely friendly, as it exceeds the low print seen in the June CPI.  But, consensus risks being too high. Real GDP could be problematic -- the low consensus GDP estimate is a positive for the Fed, but the high Atlanta Fed model estimate is not.  

The consensus estimates for the PCE Deflator -- +0.1%  m/m Total and +0.2% Core -- seem too high,  given the low June CPI (-0.1% Total and 0.1% Core).  Re-weighting the CPI components and taking account of some PPI components suggest the PCE Defllator could be 0.1% pt lower than consensus for both Total and Core.  The y/y would fall for the Total PCE Deflator even with the consensus estimate.  The y/y for Core would be steady with the consensus estimate, but decline if the downside risks materialize.

Consensus looks for 2.0% (q/q, saar) Q224 Real GDP Growth, which would be in line with the Fed's estimate of the longer-run trend and be an acceptably modest pace from a monetary policy perspective.  However, the Atlanta Fed model currently estimates 2.7% for Q224 Real GDP, which would be too high for the Fed.  (The estimate is updated one more time on Wednesday.)  Above-trend growth removes a reason to cut interest rates.   The best that could be said about the Atlanta Fed model estimate is that it would put the H124 Real GDP pace at 2.0%, averaging 2.7% with the 1.3% growth in Q124.  The H124 pace would be near the bottom of the 1.9-2.3% Fed's Central Tendency Forecast for 2024 and in line with the longer-run trend estimate.   Nevertheless, an Atlanta Fed-like print would probably be viewed negatively by the stock market for being too high from the Fed's perspective.

Labor market data are more supportive of the consensus GDP estimate than the Atlanta Fed model's.  First, Total Hours Worked rose 1.6% (q/q, saar) in Q224, versus 0.9% in Q124.  Second, the increase in the Unemployment Rate over Q224 suggests below-trend economic growth, even taking account of lags between growth and the Rate. 

Last Wednesday's sell-off can be explained a number of ways, including the above-consensus prints of almost of all of the week's real-side data -- mentioned as the risks in last week's blog.  One explanation that may resurface is the impact of political decisions stemming from November elections.  The Democrats and Republicans have different agendas, but both are potentially problematic for the economy and stock market.

The press blamed the sell-off in tech stocks on a Bloomberg story about the Biden Administration considering tighter restrictions on chip sales to China.  Tighter restrictions clearly would be a negative for the impacted companies.  The effects would be broader if China takes retaliatory measures.  To be sure, tighter chip restrictions now are just a possibility, and the leak of their consideration conceivably may have aimed at squashing them.

The Trump approach to China (and the rest of the world) appears to be the imposition of 100% tariffs.  This could have several effects.  It would be a clear negative if other countries respond by imposing tariffs on US exports -- a rehash of the Smoot-Hawley Tariff Act of 1930, blamed for worsening the Great Depression.  If other countries don't respond, the dollar should appreciate to a point that offsets the tariffs (to the extent they are passed through fully or partially) -- with no ultimate impact on prices or  economic activity.  However, if foreign companies relocate to the US to beat the tariff, their demand for factories and workers could prompt the markets to crowd out other, domestic, activities in the US.  There would be little net positive effect on overall US economic activity.  Instead, it would lower the US standard of living, as producing goods domestically would be more costly than what had been done abroad.