Mixed Surprises in this Week's Key US Economic Data?

The stock market may find mixed surprises in this week's key US economic data.  In particular, the August PCE Deflator risks printing below consensus, while the September Employment Report may be on the stronger side.  Even if some data raise disappointing risks, such as a strong Employment Report, the market's downside could be limited ahead of expected strong corporate earnings reports in October.   

Consensus looks for a high August PCE Deflator (+0.4% m/m Total and +0.3% Core).  On a y/y basis, the Core is seen speeding up to 3.4% from 3.3% in July.  However, Fed Chair Warsh said in his post-FOMC news conference that Fed staff looked for the y/y to slip to 3.6% from 3.7% for Total and to fall to 3.2% for Core.  The latter implies +0.1% m/m.   So, the risk is that consensus is too high.   

A lower-than-consensus print could prompt relief in longer-term Treasury yields, but the Treasury market may remain concerned about a possibly strong September Employment Report at the end of the week.  Consensus, however, expects a calm Report.  Payrolls are seen slowing to +100k m/m from +162k in July, with the Nonfarm Workweek falling back a bit, and the Unemployment Rate edging up to 4.2% from 4.1%.  Private Payrolls are seen slowing to +85k from +127k.

To be sure, the market may view a consensus Payroll print as strong.  It would be above the prior 3-month average of +71k m/m and the +75k pace that is consistent with a steady Unemployment Rate if the Labor Force Participation Rate doesn't change.  A decline in the Nonfarm Workweek, however, would be an offset to the Payroll increase in terms of Total Hours Worked.  So, there would be less significance for economic growth if the consensus estimates are right.

The Unemployment Claims data point to a speedup in Private Nonfarm Payrolls, but they are not necessarily inconsistent with the consensus estimate.  This is because Private Payrolls were boosted by a 62k jump in Leisure and Hospitality jobs in August that made up the declines over June and July.   Ex this rebound, Private Payrolls rose only 65k in August.  This may be the more relevant comparison for evaluating the Claims data than the printed data.  So, a consensus print would be consistent with the implication of a speedup by the Claims data.

The Claims data also suggest a decline in the Unemployment Rate.  However, this may show up only in the unrounded Rate.  The latter was 4.14% in July.  It would need to fall by more than 0.09% pt to round to 4.0%.  Note, the Labor Force Participation Rate rose in July after having fallen over the prior 8 months (helping to increase the July unrounded Rate).  The uptick could have been a small sample effect of the Household Survey, and a reversal in September could work toward pushing the Unemployment Rate down.  A further increase in the Participation Rate would be good news for the economic growth outlook as it would signal the possibility of increased capacity to grow ahead.

An important part of the Report should be Average Hourly Earnings (AHE).  Consensus looks for a trend +0.3% m/m.  A trend print would show that the stronger labor market is not generating inflationary pressures.   It could take some steam out of the market's concern about the inflationary implications of stronger economic growth.

The Treasury market may focus on the September Mfg ISM as well as the Employment Report, inasmuch the market was spooked by the near-5 point jump in the Market US PMI Report last Thursday.  The consensus estimate of a small increase in the Mfg ISM to 54.8 from 54.6 in August may offer relief, even though it would be a new high for the move up.   

There is an irony to the surge in long-term Treasury yields.  The related increase in mortgage rates risks shifting housing demand away from home buying to renting.  Resultant higher rents will eventually feed into the CPI and PCE Deflator, boosting inflation.  So, an unwinding of the surge in longer-term yields, either because of weaker-than-expected economic data or because of good news from the Iran war, would be favorable for the inflation outlook and help dampen expectations of Fed tightening ahead.