This Week's FOMC Meeting -- A Short-Lived Disappointment?

The stock market may be disappointed by the outcome of this week's FOMC Meeting.  But, the disappointment could be short-lived.  After rallying on the belief that the Fed will downshift rate hikes after this week's 75 BP hike, stocks could pull back somewhat if the Statement and Fed Chair Powell do not say so explicitly but emphasize data dependency in discussing future tightening.  Although this emphasis would keep open the door for a downshifting at the December FOMC Meeting, it is no guarantee.  It could depend on whether US economic data released up to the December meeting show lower inflation or weaker economic growth. 

The Fed could stick with its data dependency approach to tightening because so far there is little evidence that it is achieving its goals.  Economic growth picked up in Q322 and core inflation remained high.  Without evidence of success, the bond market could sell off if the Fed downshifts -- viewing it as premature.  

This week's October Employment Report (due Friday) and September JOLTS data (Tuesday), however, could fit the bill and keep alive the market's belief in a December downshift -- and thereby sustain the rally.  Consensus expects the October Employment Report to show a Payroll slowdown, an uptick in the Unemployment Rate and a modest increase in Average Hourly Earnings.

The Claims data support a forecast of a smaller Payroll in October than September's +263k m/m,  Consensus expects +220k.  Anecdotal evidence also suggests some jobs softness.  News reports indicate that retailers may hire fewer-than-normal holiday workers this year.  Retail job weakness may show up more in November and December than in October, however.  A Payroll slowdown would be in the right direction from the Fed's perspective, but a slowdown to +100k or less would be needed to clearly indicate a softening in labor market conditions.  

The consensus expectation of a 3.6% Unemployment Rate, up a bit from September's 3.5%, also does not suggest a significant easing in labor market conditions.  The uptick could be just noise.  The Rate needs to rise to 3.8-3.9% by year end to meet the Fed's expectation seen in its Central Tendency Forecasts.  

Possibly the most market-positive part of the Report would be a modest 0.3% m/m in Average Hourly Earnings, as consensus expects.  It would offer hope that labor costs are trending down.

The September JOLTS data also could provide encouraging evidence that the labor market is cooling.  A drop in Job Openings to sub-10 Mn from 10.05 Mn in August would indicate that excess demand for labor is winding down.  To be sure, Job Openings were in the 7 Mn range prior to the pandemic.  So, excess labor demand is likely to remain a problem for the Fed at this point.

In contrast to these softer Reports, the risk is for a counter-consensus increase in the October Mfg ISM (Tuesday), based on some regional manufacturing surveys.  Consensus looks for a dip to 50.0 from 50.9 in September.  The manufacturing sector is mixed.  The motor vehicle industry is escaping from the shortage problem.  Although some analysts raise concern about the impact of higher borrowing costs on vehicle sales, there is probably pent-up demand that needs to be satisfied.  Airlines, too, appear to be placing orders for additional planes now that air travel has bounced back.  Increased defense spending and a shift to "on-shore" production also are positives.   But, construction-/housing-related manufacturing likely is facing difficulties. An increase in the Mfg ISM could help persuade the Fed to stick to data dependency in talking about future tightening.