This Week's FOMC Meeting

The stock market will continue to be dominated by developments in the Iranian war and their impact on oil prices this week.  Fed Chair Powell's post-FOMC news conference will be a focus in the background, as the Fed is not expected to ease this week.  His comments are not likely to move the market significantly, as the Fed's view of the outlook has not likely changed much.

Powell could reiterate that economic growth is "solid," the unemployment rate "showing signs of stabilization," and inflation "somewhat elevated."   Although Q425 Real GDP Growth was revised down to 0.7% (q/q, saar), he already has blamed the government shutdown for temporarily hurting the economy in that quarter.  And, while Nonfarm Payrolls fell 92k m/m in February, this followed +126k in January.  The 17k 2-month average is in line with the anemic 10k m/m average in 2025, which Powell has blamed on the drop in immigration and associated slowdown in population.

All this would be old news with little market impact.  More interesting comments would be his views on the impacts of tariffs and the war on inflation and the economy.  The question is whether he views these impacts to be temporary.   Does he still think the impact of tariffs will recede in coming months?  Does he expect the same for the impact of the war?  He may just say that it adds another layer of uncertainty to the outlook, but it is too soon to draw any solid conclusions.   Commentary such as this  would likely have little market impact.

What may be the most interesting is if he discusses the effects of AI on the labor market.  While he could attribute some of the weakness in Payrolls to AI, he is unlikely to offer a specific estimate of the job losses associated with it.  Nevertheless, it would be of interest to the market if he discusses the implications of a possible large number of AI-related job losses for monetary policy.  In principle, an avalanche of AI-driven job losses would call for easier monetary policy.  The avalanche would have to show up in a higher unemployment rate to indicate a looser labor market.  An acknowledgement of this implication for monetary policy would be a market positive as it would dampen fears of an AI-driven recession.

Labor market weakness may be continuing, according to Unemployment Claims data.  Hiring appears to have remained dormant into early March, although layoffs have not accelerated.  Continuing Claims remain elevated while Initial Claims are stuck in the range seen so far this year.  If these data do not improve over the next few weeks, another decline in Payrolls could be in the cards for March.

Powell may comment on last week's February CPI and January PCE Deflator.  The CPI had both good and bad news regarding the inflation outlook.  On the good side, the important Owners' Equivalent Rent (OER) stayed low at 0.2% m/m -- essentially in line with the Fed's 2% inflation target.   Moreover, Primary Rent slowed to 0.1%, which could be a precursor for a similar slowdown in OER ahead.  On the bad side, many of the CPI components had increases in line with their recent trends, showing inflation is sticky.  

The January PCE Deflator was on the high side, with Total up 0.3% m/m and Core up 0.4%.  The y/y slipped to 2.8% from 2.9% but the Core edged up to 3.1% from 3.0%.  Nevertheless, with the Core CPI slowing in February, it is likely that the same will happen to the PCE Deflator.  Moreover, the slower pace would result in notable lower y/y's for both Total and Core, as the base effects are favorable. 

 

 

Sticky Inflation, Weak Labor Market

The stock market should continue to be impacted by developments in the Iranian war this week, particularly as they affect oil prices.  In addition, it will contend with inflation news in the February CPI and January PCE Deflator releases, some of which may be disappointing.  The Fed will probably keep policy steady at the following week's FOMC Meeting, balancing upside risks to inflation with downside risks to the labor market.  

Consensus looks for good news from the February CPI, expecting Total and Core to climb by only 0.2% m/m.  The y/y would be steady at 2.5% for Core and edge up to 2.5% from 2.4% for Total.  Both are not far above the Fed's 2% inflation target.  A consensus print looks reasonable, but it could require Owners' Equivalent Rent (OER) to stay modest at 0.2%, Used Car Prices to be benign, and Airfares to flatten after jumping in January.  

In contrast, consensus expects a high January PCE Deflator, with Total up 0.3% m/m and Core up 0.4%.  The y/y would be steady at 2.9% for Total and rise to 3.1% from 3.0% for Core.  A higher print than January's CPI (0.2% Total and 0.3% Core) is a reasonable expectation, given that the drop in Used Car Prices, which helped hold down the CPI in January, has minimal impact in the PCE Deflator.  And, OER has a smaller impact in the PCE Deflator than in the CPI.  Also, Airfares were high in both the PPI and CPI in January, so will be the same in the PCE Deflator. 

The weak February Employment Report balances any bad news coming from the inflation reports.  The -92k m/m drop in Nonfarm Payrolls resulted from widespread declines among sectors.  Eight of the eleven major sectors posted declines.   Bad weather may have been a factor behind the decline, but so may have AI, hiring caution, or weaker labor demand.  The Fed will most likely want to see whether the labor market weakness was temporary or the start of a more prolonged issue that requires a policy response.  So, it is not likely to respond immediately with a policy easing.

Despite the uptick in the Unemployment Rate to 4.4% from 4.3%, wage inflation remained high for the second month in a row.  Average Hourly Earnings (AHE)  rose 0.4% m/m in both January and February.  The January increase could have been just an offset to the low 0.1% in December.  However, the large February increase is troubling for the Fed's 2% inflation target.  Large wage increases were widespread, with 8 of 13 sectors posting increases of 0.4% or higher.  The Report followed the release of Q425 Compensation/Hour (the broadest measure of labor costs), which also was high.  This measure jumped 5.7% (q/q, saar).   Although the jump could have just reflected volatility, its y/y did not show any softening.  It rose 4.1%, the same as the increase over 2025.   At best, it signals that inflation is likely to remain sticky.

To be sure, the high February AHE could reflect a compositional shift toward higher-paid workers, perhaps because fewer lower-paid new workers are being hired.  It (as well as January's) could have reflected hikes in the minimum wage in some states, as well.  In any case, the Fed will probably want to wait and see if last year's downtrend in wage inflation has ended or will resume.  

 

 

 

 

 

 

 

 

Iran and Key US Data This Week

The stock market may remain in a range this week, as consensus estimates do not look for a break-out print by key US economic data -- although they are expected to be mostly on the soft side.  Uncertainty about the the consequences of the US-Israeli attack on Iran could weigh on the market,  However, Trump's having said the Iranians want to "talk" and that he expects the fighting to last a month or less, a sell-off could be a buying opportunity.

The Mfg ISM is expected to dip to 52.3 in February from 52.6 in January.  This print still would signal moderate manufacturing growth. 

The February Employment Report is expected to show modest job gains and a steady Unemployment Rate.  Consensus looks for a slowdown in Nonfarm Payrolls to +60k m/m from +130k in January, consistent with the implication of Continuing Claims (see table below).  Both months' job gains would be well above the +15k m/m average in 2025, although they would be considered weak from a longer time-frame perspective.  A continued stronger pace than 2025's may be considered a positive by the stock market -- relief about the impact of AI even though it would argue against Fed easing.

The best way to judge the strength or weakness of job gains is in terms of the Unemployment Rate, as long as the latter is near full employment.  Job growth should be seen as adequate if the Unemployment Rate is steady.  Another way of saying this is that job growth would equal Labor Force growth.  With the Unemployment Rate having risen 0.3% pt to 4.4% over 2025, the job gains then were weak.  In contrast, the jobs gain in January 2026 should be viewed as strong since the Unemployment Rate fell 0.1percentage point to 4.3%.  Consensus looks for a steady 4.3% Rate in February.

Weak job growth could be indicative of sluggish GDP growth.  However, this is not necessarily the case.  Strong productivity growth could substitute for job growth to achieve strong GDP growth.  Market discussions regarding the impact of AI on the labor market reflects this possible substitution.  However, if AI is behind higher productivity and weaker job growth, then a higher Unemployment Rate should be seen, as well.  

To be sure, productivity growth has been strong and is expected to have continued in Q425.  Consensus looks for Q425 Nonfarm Productivity to increase 4.8% (q/q, saar), essentially the same as the 4.9% in Q325.  However, this estimate looks too high, and a print near the 2.0% recent trend seems more likely.  This trend, to be sure, is above trends of 1.0-1.5% seen in the past and is the reason the Fed raised its estimate of potential GDP growth recently.  

The slowdown in population growth stemming from fewer immigrants works against strong potential GDP growth.  The latter is the sum of labor force and productivity growth.  However, what is more important than overall GDP growth is per capita GDP growth.  The latter is what determines the standard of living.  It could rise even if overall GDP growth is modest.  Productivity growth plays a major role in it. Slower economic growth per se would not hurt the standard of living if the slowdown matches that of population.

This week's data will include evidence on wage inflation.  Consensus looks for a reversion in Average Hourly Earnings (AHE) to a trend 0.3% m/m, after volatility in December-January (0.1% followed by 0.4%).  Consensus also expects a slight 0.2% (q/q, saar) increase in Q425 Unit Labor Costs (ULC).  However, this estimate reflects the possibly too-high Productivity estimate.  A near-2.0% (q/q, saar) increase in Q425 ULC may be more likely -- not a bad number relative to the Fed's 2% price inflation target.

                                     Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS    Continuing Claims *        

    March               155                          209                            120

    April                   62                          167                            133                               14                            

    May                    37                          140                              69                              -74           

    Jun                    -33                            74                             -27                              -57                              

    Jul                    104                            83                               77                               18   

   Aug                     54                            38                               -4                                 2                            

   Sep                    -32                           119                              104                             28 

   Oct                     42                             na                                  1                             -41 

   Nov                   -32                            69                                41                               14

    Dec                   41                            37                                 48                               30     

    Jan 26               22                          172                                 na                               94   

   Feb                    63                            na                                 na                              -14                                   

 * the inverted change in Continuing Claims between Payroll Survey Weeks, 000s