Soft Inflation Data Should Help Stocks This Week

The stock market should continue to rally this week, after brushing off soft US economic data last week.  The market appears to be treating weakness as temporary, expecting it to end once the Fed cuts rates.  This week's inflation data for June are expected to support expectations of a Fed rate cut.  Nevertheless, as Fed Chair Powell is likely to repeat at his Semi-Annual Monetary Policy Testimony this week, June data are not sufficient to guarantee a September cut; more evidence of a sustained slowdown in inflation will be needed.  Although Powell is not likely to be specific, July and August data could be the trigger as they will be out before the September FOMC Meeting.

Consensus looks for a benign June CPI this week, with Total up 0.1% m/m and Core up 0.2%.  A flat Total CPI can't be ruled out.  With Powell saying that he liked the May CPI Report (0.0% Total, 0.2% Core), a consensus print for June would be a step in the direction of a September rate cut.  Since the July and August CPI Reports will be out before the September FOMC Meeting, this week's prints will not be decisive.  

Consensus also expects a modest June PPI, although higher than May's.  Total is seen up 0.1% m/m after -0.2% in May.  Core is seen up 0.2% after 0.0% in May.  This report is not as important as the CPI.

Friday's June Employment Report was not an "all clear" for a September Fed rate cut,  but it kept the door open.  The "best" news for the Fed was the increase in the Unemployment Rate to 4.1%.  Greater labor market slack should give Fed officials more confidence that a rate cut would not quickly result in an overly tight labor market.  The Report also pointed to slower economic growth.  Most of the job growth was in low-productivity sectors.  Stripping out the 70k jump in government jobs (mostly in state/local governments) and 82k jump in health/social assistance jobs, Payrolls rose only 54k.  The latest Atlanta Fed model estimate of Q224 Real GDP Growth is1.5% (q/q, saar).

The Employment Report, however, suggests that wage inflation is not low enough for the Fed.  Although the return to the 0.3% m/m trend in Average Hourly Earnings was somewhat of a relief after the +0.4% in May, the Fed would probably like to see it a little lower.  Less than half of the 13 major sectors had low increases of 0.2% or less, as was the case in the prior couple of months.  It shows that the deceleration  in wage inflation to a desirable pace has not been broad-based.