Recent Data Good for Stocks

The stock market should continue its rally into year end, even if the Fed does not cut rates at the December 17-18 FOMC Meeting.  Economic growth is solid and inflation is somewhat elevated, which are market-positives despite the possibility of steady Fed policy.  In addition, potential negatives stemming from Trump's tariff threat are too far ahead to pose a near-term problem for the market (but this could change in Q125).  And, there is still a possibility that Mexico or Canada may agree to Trump's demands regarding immigration and drug flows before the tariffs are implemented.

The November Employment Report did not change the story of solid economic growth and somewhat elevated inflation.  Smoothing out the impacts of weather and strikes,  Total Hours Worked look to be up 0.7% (q/q annualized) in Q424, which would a tad higher than the 0.6% in Q324.  If Productivity Growth is the same in both quarters, Real GDP Growth should be close to the 2.8% seen in Q324.  The latest Atlanta Fed model estimate is 3.3%.  Wage inflation remained somewhat elevated in November.  The 0.4% m/m increase in Average Hourly Earnings matched the higher pace seen since August.  AHE probably have to trend at 0.3% or less to be consistent with the Fed's 2% inflation target.  A positive is that the unrounded increase in AHE was 0.37% in November, down from 0.42% in October.  

The Fed is likely to support a decision to keep rates steady by lifting its Central Tendency forecasts.  The latest data suggest /1/ the forecast of Real GDP Growth in 2024 would be hiked to about 2.7% from 2.1%, /2/  The forecast of the Q424 Unemployment Rate lower at 4.1-4.2% from 4.3-4.4%, and /3/ the PCE Deflator forecasts 0.1-0.2% points higher.  Stronger forecasts could be made for 2025, as well.

This week's inflation data are not expected to change the story.  Consensus expects the November CPI to post an increase of 0.2% m/m for Total and 0.3% for Core -- the same as in the prior 3 months.  The y/y would edge up to 2.7% for Total and be steady at 3.3% for Core.  To be sure, the same potential for lower prints exists as has been the case in the past couple of months.  It would likely require Owners' Equivalent Rent to slow to 0.3% from 0.4% and more subdued prints for volatile components such as Used Car Prices and Airfares.  These conditions were not met in the past couple of months.  Moreover, the dispersion of price increases moved up over the past couple of months, possibly resulting from higher wage inflation, and it will be important to see if it has continued to do so (see table below).

                                 Number of Major Core CPI Components 

                                   0.2% or Less                     0.3% or More

Oct                                    7                                         9                                       

Sep                                   9                                         7

Aug                                  13                                        3

July                                    8                                        8

June                                 13                                       3

May                                  11                                       5