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Protests Complicate FOMC Statement Amid Recovery

After the May employment report showed slight improvement after the overwhelmingly negative April report, the attention in the week ahead turns to the monthly US inflation reports and Wednesday’s FOMC meeting, as well as the first look at June consumer confidence.

The FOMC meets Tuesday and Wednesday at a time that is both the same and different than it was at its last meeting on April 28-29.

The economic impact of the COVID-19 crisis remains of course. Despite the May surprise, payrolls levels are still well below the point in the winter when the economy was booming and the unemployment rate was at a 50-year low. Retail sales and factory activity data for April released in mid-May showed considerable contraction.

However, when the Committee meets this time, it is with some light at the end of the tunnel. The long-awaited partial reopening of several states, which was not fully in place at the end of the April, has since begun.

People are dining in restaurants again – or outside of them at least – and factories are starting to ramp up. Nonessential retail businesses have reopened with some capacity restrictions.

In short, it will be the message, rather than any actions, that will be looked for in the post-meeting statement and press conference. And it will be hard to turn off the alternating bombardment of improved virus statistics and increased protests.

The FOMC will need to weigh those bright spots against the images of protests across the country that will have a dampening effect on the pace of recovery, producing a statement that reflects a careful balance of several different factors.

Inflation Not a Concern

One issue the Committee will not have to spend too much time concerned about is bubbling inflation. Both wholesale and consumer price levels fell in March and April and are not expected to rebound sharply in the May data released in the coming week.

The year/year rates are well below the levels the FOMC would like to see in normal times, so even an acceleration of prices during the recovery is not going prompt any response.

Energy prices continue to decline due to severely reduced demand for gasoline, while food prices could tick higher. Core prices will be pulled lower by continued soft demand, but increases in coming months are likely as the return to normal business continues. Even then though, it will not be a major source of worry.

Confidence Hit by Protests

The June consumer confidence readings from Investors’ Business Daily, on Tuesday, and the University of Michigan, on Friday, should reflect the impact the protests will have on consumer attitudes at a time when some states are reaching the next stages in their economic reopening plans.

While it is likely the protests will be relatively temporary, they overwhelmingly occurred in major cities like Los Angeles, New York and Washington, DC. As a result, the economic impact will be magnified.

Keep an Eye on Continuing Claims

The weekly initial claims reading on Thursday will continue its recent trend, with a week/week decline for the June 6 week, but a still relatively high level. Backlogs appear to be winding down, but new filings continue to stream in by the millions due to continued layoffs.

More important to watch than the sustained downward trend of new filings is the continuing claims figure. After a large dip in the May 16 week, there was a relatively minor rebound in the May 23 week. If this series, which measures the number of people currently receiving benefits, remains on a generally downward trend, it will indicate rehiring has begun in earnest.

Inventories Plunge in April

The severe slowdown in activity cut into inventories and growth in April, as evidenced by the data already released. The one exception was a modest 0.4% increase in the advance estimate for wholesale inventories, subject to revision in Tuesday’s updated report.

The advance reading for retail inventories already showed a 3.6% decline, as nonessential businesses needed less stock as sales plummeted. Factory inventories fell by 0.4%. As it stands right now, business inventories are projected to decline by 1.2%.

That is nothing compared to sales. April retail trade sales fell by 15.1% and factory shipments fell by 13.5%. Wholesale sales will be released with Monday’s inventories data and should be in line with the already released data.

Treasury Budget Another Disappointment

The US Treasury’s monthly budget statement, released on Wednesday afternoon at the same time as the FOMC statement, will likely be shrugged off, and not just because of the timing.

The May deficit will be exceptionally large for the second straight month, considering the enormous stimulus payments and the dip in tax receipts from both businesses and individuals.

Assuming the IRS does not move the tax deadline date further from its current July 15 placement, the large deficits could see a pause then. But there is nothing to save the May and June gaps.

Jolts Data Reflect Payrolls Weakness

The BLS’s JOLTS report for April released on Tuesday will provide some texture to the enormous payrolls decline for that month, but could offer some guidance on what led to the slightly better May payrolls figures.

Job openings and hiring likely contracted in April, while layoffs surged by historical proportions. Abnormally, quits could also rise, as workers chose to leave their jobs on their own rather than risk exposure to the coronavirus.

Kevin Kastner

Julie Ros

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