Relief for Stocks from FOMC Meeting and US Economic Data This Week?

The stock market may get some relief from this week's FOMC Meeting and key US economic data, although they are not expected to break new ground.   Steady Fed policy for now, but with rate cuts on the horizon is likely to be the message from this week's FOMC Meeting.  Powell could hint at a September rate cut, but he'll have another opportunity at the Jackson Hole Conference on August 24-26.  Key US economic data are expected to be in line with recent trends showing moderate growth.  As-expected outcomes of the Meeting and data still could help stabilize the market by underscoring the essentially positive macro background. 

The Fed is likely to keep open the door for rate cuts at this week's FOMC Meeting, but reiterate that it needs more evidence that inflation is trending down before deciding to ease.  July and August data will be available ahead of the September FOMC Meeting.  Total PCE Deflator would need to print 0.2% m/m on average in the two months to bring down the y/y from 2.7% in June by the time of the Meeting.  A 0.1% print for Core would keep the y/y steady at 2.6%. 

Recently, Powell highlighted an apparent slowdown in economic activity, providing another reason for a rate cut.  He may not back away from this possibility despite the above-trend 2.8% Q224 Real GDP.  Real GDP Growth was about 2.0% over the first half of the year, well short of the 3.2% 2023 pace.  He also may emphasize that the underlying Final Sales growth of 2.0% (in line with the Q124 pace) is near the longer-run trend.  

To be sure, this near-trend pace doesn't scream for easier monetary policy.  Indeed, the Q224 GDP composition highlights the stimulative force from government policy that Powell (probably for political reasons) hardly, if ever, mentions -- the strength of government purchases, both at the Federal and State & Local level and the strength in Business Equipment Spending, also seen in June Durable Goods Orders, likely reflecting in part government-induced spending on alternative energy and re-shoring of manufacturing from abroad.  So, while a September Fed rate cut is widely expected, it may need more supportive evidence -- perhaps both on the inflation and real-side fronts -- to happen.

The 0.2% m/m Core PCE Deflator in June was somewhat disappointing from the Fed's perspective.  Not as low as the June Core CPI, it matched the m/m increase in June 2023 and kept the y/y steady at 2.6%.  However, the unrounded m/m increase is 0.18%, so was within statistical noise of printing 0.1%.   So, the data will not likely change the Fed's expectation of a downtrend in inflation.  

This week's July Employment Report may reinforce the view that economic growth is solid but still leave open the door for a September rate cut.  Consensus looks for a slight slowdown in Total Nonfarm Payrolls, to +185k m/m from +206k in June.  Private Payrolls are seen speeding up to +155k, versus +136k in June.  Despite the speedup, a sub-200k Payroll print may be soft enough to be viewed positively by the Fed and markets.  Consensus looks for benign prints for the other important parts of the Employment Report.  It sees a steady 4.1% Unemployment Rate and a trend-like 0.3% m/m increase in Average Hourly Earnings.