Markets Hoping for Calming Evidence, But...

The stock market hopes to see evidence that would lower the risk of Powell's threat to tighten beyond what was projected in the FOMC Central Tendencies.  Last Wednesday's bounce showed the sensitivity of the markets to official actions or hints to that effect.  The reversal of Wednesday's market moves, however, showed that evidence of a more concerted downshift in Fed views is needed to support the hope that Fed tightening will be "contained."  It is probably too soon to see a more general relaxation in Fed views, particularly since this week's key US economic data may not be weak enough. 

The most important report is the September Employment Report.  There is either mixed or no evidence regarding the risks surrounding the mostly benign consensus estimates.

    a.  Consensus looks for a slowdown in Payrolls to +250k m/m from +315k in August.  The slowdown would be welcome, but the magnitude of the gain is still too high.  Job growth needs to be closer to +100k to be in line with population growth, unless Labor Force Participation rises.  The evidence is mixed.  The Claims data do not suggest a slowdown.  There is still a possibility, however, that Payrolls could catch up to the smaller job gains indicated by the ADP Estimate during the summer.  

     b.  Consensus looks for a steady 3.7% Unemployment Rate, which is consistent with the Claims data.  An increase may be what's needed for the markets to feel the Fed is getting closer to meeting its goals.  The currently low Unemployment Rate is a sign that the problem facing the Fed is that the level -- not the pace -- of economic activity is too high.  

     c.  Consensus expects +0.3% m/m for Average Hourly Earnings, the same increase as in August and a "good" number regarding the Fed's desire to see wage inflation moderate.  There is no evidence to indicate the risks to the consensus estimate.  However, the low August print may have been just an offset to the high 0.5% July print.  If so, September could revert to the 0.4% trend.

Some of the disparate evidence could be reconciled if many companies are freezing hiring and letting natural attrition reduce job count.  If this is the channel through which the labor market eases, it could show up in /1/ slower job growth, /2/ no effect on Unemployment Insurance Claims,  /3/ little change in the Unemployment Rate, and /4/ lower wage inflation as higher-paid workers retire.  At the same time, companies could maintain listings of Job Openings but without intention to fill them soon.  While there have been news of some large companies freezing hiring, it is not clear how extensive this is.

Another important report this week will be the August JOLTS data.  The Fed sees excess demand for labor in the high levels of Job Openings and Quits.  At 11.2 Mn in July, Job Openings remain close to the pandemic peak of 11.4 Mn.  They were around 7.0 Mn prior to the pandemic, suggesting excess demand of 3.2 Mn jobs.  At 4.1 Quits in July, they are not far below the 4.5 Mn pandemic peak and well above the 3.5 Mn pre-pandemic levels.   A lot of people presumably are changing jobs for higher pay -- not good if the goal is to reduce wage inflation.

Consensus expects a decline in the September Mfg ISM to 52.3 from 52.8 in August.  The evidence is mixed.  But, the most accurate in recent months has been the Chicago PM, and it predicts a decline.  The fundamentals behind the manufacturing sector are mixed.  Defense-related industries are being helped by a restocking of guns and ammunition.  Motor Vehicle production is slowly recovering from supply constraints.  And, recent legislation boosted new infrastructure spending and encouraged a shift of production from China to the US.  But, the stronger dollar is making imports more competitive, allowing them to expand market share, while also making exports less competitive abroad.  Any expansion of the manufacturing sector would put upward pressure on interest rates, crowding out other economic activity, given the Fed's goal to weaken the economy.

Fears that the markets were in the process of overshooting may have been behind the Bank of England's bond buying and the calming comments by a couple of Fed Bank Presidents last Wednesday.  Philadelphia Fed Bostick and SF Fed President Daly asserted that the Fed is not aiming for recession.  Daly's comment is significant because she had dismissed concern about the labor market earlier this year.  It remains to be seen whether these comments were isolated or the start of a more concerted effort by officials to calm the markets.  At this point, other Fed officials' comments appear to adhere to Powell's hawkish stance, which may help explain why the stock market fell back on Thursday and Friday.  A number of Fed Bank Presidents will give speeches this week.