Optimism Ahead of Key US Economic Data?

The stock market may trade optimistically this week as key US economic data could persuade the Fed to skip hiking rates at the September 19-20 FOMC Meeting.  The August Employment Report should be softer than July's, and it may be soft enough to assuage the Fed.  Even modest softening in Payroll growth and an uptick in the Unemployment Rate -- which is the risk -- may be enough, given Powell's comment that the Fed could "proceed carefully."  The Mfg ISM may tick up, but remain at a low level -- not a surprise for the Fed. 

Powell's speech at Jackson Hole on Friday highlighted the importance of slower economic growth and an easing in the labor market conditions in determining Fed monetary policy.  Two potential triggers of a rate hike are evidence that Real GDP Growth will continue to exceed its long-run trend (1.7-2.0%) and that the labor market is not softening enough.  

The Atlanta Fed model's latest estimate of 5.9% (q/q, saar) for Q323 Real GDP Growth is troublesome from this perspective.  However, it is still an early estimate and could come down as more data become available.  Indeed, softer data over August and September could point to slower GDP growth in Q423, which could comfort the Fed.

Consensus estimates for the August Employment Report may cement expectations for a pause at the September FOMC Meeting.  Consensus looks for Nonfarm Payrolls to slow to +170k m/m from +187k in July.  The Unemployment Claims data support the idea of a slowdown in Payrolls.   However, the consensus estimate still is high enough to keep the labor market under pressure.  The Fed would probably like to see Payrolls rise by about 100k or less to indicate sufficient easing in demand for labor, but it may be willing to wait to see if this degree of jobs slowdown evolves -- as long as the trend is down.  Reflecting a continuation of tight market conditions, consensus sees a steady 3.5% Unemployment Rate.  The Claims data don't rule out a slight uptick in the Rate, however.  Consensus also expects Average Hourly Earnings (AHE) to slow to 0.3% m/m from 0.4% in July.  AHE printed 0.4% in each month since April.  

A 0.3% m/m print in AHE would be a welcome slowdown from the Fed's perspective.  Arguably, it would be consistent with the Fed's 2% Inflation Target once productivity is taken into account.  Moreover, Powell mentioned that wage sensitivity to unemployment may have changed.  This suggests that a moderation in wage inflation in the face of low unemployment could diminish the importance of the latter regarding the inflation outlook.

The other key data this week is the August Mfg ISM.  Consensus looks for an uptick to 47.0 from 46.4 in July.  Evidence regarding the m/m direction is mixed.  The consensus estimate is still below the 48.7 historical demarcation between expansion and recession.  A low, consensus-like print would not surprise the Fed.  Powell mentioned that the trend in Manufacturing Output has been flat this year.