Stock Market Helped By US Economic Data This Week?

The stock market could be helped by this week's US economic data, which should point to moderate economic growth and inflation -- either in the headlines or once volatility is smoothed out.  Consensus is likely to coalesce around a "measured" pace of 25 BP rate cuts by the Fed beginning in September.  Fed Chair Powell could discuss such an approach at the Jackson Hole Conference (August 24-26).  Anticipation of his speech could help lift stocks this week.

Normal volatility or one-off events, like bad weather, could look like recession when the economy is growing near trend.  The 1.7-2.0% estimate of longer-run growth estimated by the Fed is close enough to zero to make large negative shocks look as if the economy is moving into recession.  More than one month's reports are needed to confirm the latter for this reason.  

Similar considerations apply to inflation data, for which volatility could mask the underlying pace.  Volatility is a risk in this week's July CPI.  The consensus estimate of +0.2% m/m for Total and Core would be favorable prints, nudging down the y/y by 0.1% pt for each.  However, there is a risk of a 0.3% Core from a rebound in Airfares.  Seasonal factors look to offset a large drop in airfares in July.  Their drop in June suggests airlines may have pulled ahead this seasonal weakness, which helped hold down Core CPI to 0.1% that month.  If so, airfares could rebound in July, possibly resulting in a 0.3% Core.  The market will likely discount an above-consensus Core CPI print if this is the reason.  Averaging the two months would give the right measure of underlying core inflation.  And, a 0.2% average would be Fed and market friendly.

Taking account of volatility may be important to understand the July Retail Sales Report.  Consensus looks for a slight increases of 0.1% m/m in Ex Auto Sales.  This follows +0.4% in June.  The market may view a small increase as a sign of weakening consumer.   But, this is not necessarily so.  More importantly, Ex Auto/Ex Gasoline Sales jumped 0.8% in June.  So, a modest increase or even a decline in July would be a typical print after a large gain.  It still would point to decent consumption growth in Q324.  

Curiously, the Atlanta Fed model's latest projection is for a strong 2.9% (q/q, saar) in Q324 Real GDP Growth, despite all the market angst about recession.  The model estimate can change as more data come in.  And, the 3.0% estimate for Q324 Consumer Spending seems a little high.  However, at this point, the model translates the latest data into another quarter of above-trend growth.