This Week's Important US Economic Data

The stock market will face some important US economic data this week as a strong corporate earnings season gets underway.  Consensus expectations for the September CPI and Retail Sales, among other relevant but minor data, show that inflation remains high overall and sticky in the core as well as a continuing solid consumer.  This picture keeps open the door for more Fed tightening.  However, a consensus print for Core would likely allow the Fed to skip hiking rates at the October FOMC Meeting -- which would be a near-term positive for stocks.

Consensus looks for +0.6% m/m Total CPI and +0.2% for Core.  These estimates look reasonable.  Retail Gasoline prices jumped about 9% (sa) in September, which largely accounts for the jump in Total.  The higher gasoline prices could permeate through Core components, as well.  However, seasonal factors begin holding down Airfares this month after boosting them in the prior three months.  Seasonals boost Lodging Away From Home for the second month in a row, and this component could jump similarly to its 2% bound in August.  All these considerations add up to about 0.2% Core.  Nonetheless, the consensus estimate of an uptick in the y/y to 2.5% from 2.4% may be too high, depending on rounding.  An un-rounded m/m Core of 0.22% or lower would result in a steady 2.4% y/y, which the stock market may like.

Consensus looks for only a modest slowing in Retail Sales in September after they jumped in August.  Total Sales are seen up 0.3% m/m after +1.2% in August, while Ex Auto is seen +0.5% after +1.4%.  There is no consensus estimate for Auto/Ex Gasoline Sales, which jumped 1.2% m/m in August.  Even a modest increase in the latter would be notable, since a large increase can be followed by some payback in the following month.  At this point, Real Consumption looks to have expanded well over 3.0% (q/q, saar) in Q326 -- despite the weakness in surveys of consumer sentiment or confidence.

The University of Michigan Consumer Sentiment Index fell for the third consecutive month according to the Mid-October print reported Friday.  The weakness was in Current Conditions.  Importantly from the Fed's perspective, the longer-run 5-year Inflation Expectations measure rose to 3.5% from 3.4%, the highest since May and remaining above the pre-Iran war range of 2.8-3.2%.  It is not a good print from the perspective of the inflation hawks at the Fed.

 

Corporate Earnings and Fed Policy -- Near-Term Positives

The stock market may be buoyed in the next few weeks by two expectations -- strong Q326 corporate earnings and steady Fed policy at the October 27-28 FOMC Meeting.  These positive expectations could be tempered by a rise in longer-term Treasury yields.

 Corporate Earnings

Consensus looks for another quarter of huge earnings growth.  S&P 500 corporate earnings are expected to climb 23-29% (y/y) in Q326, lifted by strength in Information Technology and Energy.   This follows earnings growth of about 50% in Q226 and 28% in Q126.  The macroeconomic data support the idea of still strong earnings but not as strong as in Q226.  Real GDP Growth is seen slightly slower in Q326 than Q226 on a y/y basis.  Oil prices are still up sharply but not as much as in Q226.  The FX value of the dollar is a bit softer, making earnings abroad worth more in dollars, but not as much as in Q226 -- although this could be offset by an improvement in economic activity abroad in Q326.  Profit margins don't look to have improved, as the spread between the Core CPI and Average Hourly Earnings was steady after expanding in Q226.  

                                                                                                                                        Euro  Area   

                  Real GDP     Oil Prices      Trade-Weighted Dollar    AHE     Core CPI    Mfg PMI  

                     [                y/y percent change                                                            ]          (level)

Q126            2.6               40.0                       -8.0                               3.6           2.5                50.6     

 

Q226            2.2 *            75.0                       -4.0                               3.3           2.7                51.7      

 

Q326            2.1 *            40.0                       -1.0                               3.1           2.5                52.4          

                                                                           

* Based on the Atlanta Fed Model's latest projection of 3.7% for Q226 (q/q, saar). 

 

Fed Policy and Latest Key Economic Data

 

Last week's softer-than-expected inflation and employment data lifted expectations of steady Fed policy at the October 27-28 FOMC Meeting, although these Reports should not have changed Fed views by much if at all.  The Reports still showed higher-than-desired inflation and a solid labor market.  Nonetheless, they provide reasons for the Fed to fall back on if it wants to avoid hiking rates just before the mid-term elections.  Indeed, recent comments by two top Fed officials -- the Fed Vice Chair and the NY Fed President -- suggest they are open to skipping a tightening in October, citing a need to wait and see more data.

 

Although the headline m/m prints for the August PCE Deflator were lower than expected, the underlying pace is still higher than the Fed's 2% target.  Along with the benchmark revisions to prior months, the 0.2% m/m increase in the Core PCE Deflator resulted in 3.0% y/y.  Moreover, the Core PCE Deflator was rounded down from 0.245%.  On an annualized basis, it was up 3.0%.  The annualized increase since December is 3.2%.  Note that the Core PCE Deflator has to average less than 0.22% m/m for the rest of the year to lower the y/y by December.  All these ways of evaluating underlying inflation should not dissuade the Fed from sticking with its hawkish tilt.  

 

Similarly, although September Nonfarm Payrolls rose only slightly, the weakness was probably not enough to convince the Fed to change its view of a solid labor market.  The Unemployment Rate remained within its recent tight range that is typically viewed as full employment.  The broadest unemployment measure of the labor market -- U-6- which takes account of part-time workers for economic reasons and people marginally attached to the labor force -- dipped.  And, Total Hours Worked are up 1.2% (q/q, saar) in Q326 -- a bit more than the 1.1% in Q226.  So, they are consistent with 2.0+% Real GDP Growth in Q326, taking account of productivity growth -- better than the Fed's longer-run growth estimate of 1.8-2.0%.  

The lower-than-consensus increase in September Payrolls ran counter to the speedup suggested by Unemployment Insurance Claims data.  The contradiction suggests that the slow job growth results from  weak hiring rather than increased firings.  This result appears to have been the case over July and August.  The JOLTS Data show that a 241k decline in Separations in the Private Sector over the 2 months (that is fewer layoffs) was partly offset by a 170k decline in Hiring.  This combination is unusual.  Typically, cyclical forces lead to increased hiring accompanying reduced firings.  AI may be holding back hiring?

The difficulty of finding a job (along with high gasoline prices) may be behind the recent decline in consumer confidence.  The Conference Board's measures of Jobs Hard To Get and Jobs Plentiful could provide clues whether job finding remains a problem or is beginning to improve.  

Higher Long-Term Treasury Yields

A possible Fed reluctance to tighten ahead of the mid-term elections in the face of still problematic inflation may be behind the latest run-up in longer-term Treasury yields.  The latter may be making up for Fed inaction to fight inflation.  Although a more aggressive Fed could bring longer-term yields down, it would hurt the economy and stocks.  The best development for both the Treasury and stock market (and economy) would be an ending of the Iran war than results in a drop in oil prices.  

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.

 

 

Non-Economic Factors This Week, But...

The stock market should be dominated by non-economic factors this week -- Iran war developments,  tariff news, and the summit between Presidents Trump and Xi Jinping.  Nevertheless, last week's FOMC results had some market-supportive messages.

Among this week's non-economic factors, the Iran war is probably the most important.  Any change that results in a sharp decline in oil prices could help persuade the Fed and markets that inflation may have peaked.  In particular, the 10-year Treasury yield would likely fall below 5.0%.   

 

There was little that was new in Fed Chair Warsh’s post-FOMC news conference last week.  Regarding monetary policy, he said financial market conditions are not restrictive even after the 25 BP rate hike -- despite the economy being strong and inflation too high.  This keeps open the door for more rate hikes ahead, and the Fed's "dot" chart points to one or two more hikes this year.

 

Warsh cited the above-target 6- and 12-month moving averages of Total and Core PCE Deflator in stating that inflation is too high.  Note, however, that moving averages are backward-looking.  What may be more important is that the Fed's Central Tendency Forecasts call for inflation to move lower to 2.3-2.6% next year and then move even closer to target -- in the 2.0-2.2% range -- beginning in 2028.  Monetary policy, according to the Fed's forecasts, therefore is seen steady to softer during 2027-28.  The stock market should take some comfort in this policy outlook (at least until the data say otherwise), as it is not pointing to so much restriction to bring on a recession.  In addition, the potential for near-term rate hikes should continue to have downward influence on commodity prices and longer-term yields.

 

The markets could take a positive view of Fed policy after they see the August PCE Deflator.  The Fed staff forecasts low prints (due September 30).  The Total PCE Deflator is seen up 3.6% and Core 3.2% y/y.  These estimates imply low 0.2% m/m for Total and +0.1% m/m for Core.  To be sure, the Fed will probably have to see several months of similarly low prints to be persuaded that inflation is coming down significantly.  

 

Meanwhile, the Unemployment Claims data support Warsh's view that the labor market is strong.   Both Initial and Continuing Claims made new lows for the move down in the latest week.  At this point, they point to a speedup in September Private Payrolls.  The Atlanta Fed model's latest forecast is 5.1% (q/q, saar) for Q326 Real GDP Growth.  Real GDP rose 1.8% (annualized) over H126, in line with Fed's estimate of longer-run growth in the US.

 

 

 

 

Will Stocks Like A Rate Hike?

The stock market may react positively to a Fed rate hike at this week's FOMC Meeting, while reacting negatively if the Fed does not hike.   The markets raised their probability of a Fed rate hike after the high August Core CPI was released on Friday.  Are they right?  There continue to be mixed considerations.

Possible Stock Market Reaction 

Stocks may view a rate hike positively for several reasons.  /1/ With the Fed finally moving against inflation, longer-term Treasury yields could fall.  The short-end would be taking on some of the anti-inflation work.  /2/ Tighter policy now may reduce the extent of tightening needed later.  /3/ A tighter Fed could reduce the risk premium in commodity prices.  Lower commodity prices, particularly oil, should be a positive for stocks.  It also would work to lower longer-term yields.

In contrast, steady Fed policy could lift inflation expectations and prompt further increases in commodity prices and longer-term yields, both of which would be negative for stocks.  Also, the risk of Fed tightening after the mid-term elections would increase, possibly by more than if the Fed had moved sooner.   So, this risk would continue to weigh on stocks.  And, the markets could conclude that the Fed was bowing to pressure from the Administration, damaging its reputation of being politically independent.  

Arguments For/Against a Hike 

1. While the 0.3% m/m August Core CPI was on the high side, large increases in a couple of components -- Airfares and Lodging Away From Home -- were mainly responsible.  Higher fuel costs were likely behind the jump in Airfares for the second month in row.  Volatility appears to be behind the bounce in Lodging after the latter dropped in July.  The bulk of the Core components were benign.  The Cleveland Fed's measure of the median CPI and trimmed CPI both rose only 0.2% in August.  So, "fence sitter" FOMC members could decide to keep policy steady despite the high print, blaming it on a "bad" distribution of "noise" and higher oil prices this month.  However, they may vote to tighten in response to the stickiness of inflation.  

2.  A desire not to tighten ahead of the midterm elections could hold back the Fed, as well.   

3.  However, the Fed's credibility could be in question if it doesn't tighten, particularly since Warsh has emphasized the Fed's intent to bring down inflation.  He has said that steady but high inflation is not acceptable.  Although the y/y for the Core CPI slipped to 2.4% from 2.5%, it remains above the Fed's 2% target.  The uptick in the University of Michigan Survey's 5-year inflation expectations to 3.4% from 3.3%, reported Friday, could add to the concern that the Fed is losing credibility, as could the recent sharp increase in longer-term Treasury yields.  

4.  Another consideration, away from the latest inflation data, is that the reasons for the 2024-25 rate cuts no longer apply -- /1/ real rates are not higher because inflation fell and /2/ the labor market is not weakening, unlike what appeared to be the case then.  Arguably, reversing these cuts could be appropriate.  This reason would point to another rate hike later this year even if the Fed hiked this week.

5.  In addition, the US economy is being propelled by several independent forces -- AI build-out, defense spending and re-shoring of production.  Higher rates are needed to make room for them, given the economy is at full employment.  Indeed, as Fed officials like to point out, an AI-caused ratcheting up of productivity growth would require higher market yields.  Otherwise, there could be over-investment.

 

 

 

 

 

 

 

 

All Eyes On The CPI

The stock market may trade cautiously into the release of the August PPI and CPI on Thursday and Friday, respectively, after the strong August Employment Report.   The inflation data may be the deciding factor in persuading FOMC "fence sitters" to vote for or against a rate hike.  One fence sitter, Fed Governor Barr, said last week that he may vote for steady policy if the CPI is benign.  

A consensus-like August CPI would not eliminate the possibility of a September rate hike, but it would not guarantee one either.   Consensus looks for a high 0.4% m/m increase in the August Total CPI, boosted by higher oil-related prices resulting from Iran war developments.  A high Total, however, could be dismissed as temporary.  In contrast, a consensus-like Core CPI would point to "sticky" inflation, which Fed Chair Warsh says is unacceptable.  The Core is expected to print 0.2% m/m, which would equal the January-July average and remain above the Fed's 2.0% target on an annualized basis.   The y/y would slip to 2.4% from 2.5% for Core.   The downtick could be viewed positively by the Fed and stock market. 

A lower-than-consensus print for both Total and Core also cannot be ruled out.  Housing Rent (both Primary and Owners' Equivalent) would have to slow from July's 0.3% pace.  And, Airfares need to be flattish to down as would some other typically volatile components like Used Car Prices and Lodging Away From Home.

Fed Chair Warsh, in his Jackson Hole speech, referenced a wide decomposition of the PCE Deflator among his arguments to hike rates (see last week's blog).  A decomposition of the Core CPI by broad components shows most printing 0.2% or less in each of the past three months (see table below).  However, the share was only just above 50% in May and July, when the Core CPI printed 0.2% overall.  So, even though the decomposition differs from Warsh's PCE Deflator figures, it still shows that a broadening slowdown among CPI components is needed to achieve the Fed's inflation target.  It is not clear whether FOMC fence sitters will need to see a broadening slowdown to keep rates steady and not hike rates.  However, a broadening presumably would raise the possibility they will vote to keep policy steady.

                               Number of Broad Core CPI Components                

                             0.2% or less            0.3%        0.4% or more           Core m/m % change

May                            8 (57%)               2                4                                     0.2

June                          11  (79%)              1                2                                      0.0

July                            8   (57%)              1                5                                      0.2

 * number in parentheses is % of the distribution 0.2% or less. 

The August Employment Report confirmed the Fed view of a solid labor market.  Along with upward revisions to June and July, the +162k m/m increase in August Payrolls showed widespread, albeit mostly small, increases among sectors, with notable increases in Manufacturing and Construction.  Payrolls in Leisure and Hospitality had the largest swing, rebounding 62k in August after falling 21k in July (mostly in restaurants).  Excluding Leisure and Hospitality, Private Payrolls rose 65k in August after +92k in July.  These are solid gains in this low job-creation environment. 

The Household Survey confirmed the strength seen in Payrolls.  The Unemployment Rate was steady at a low 4.1%.  The broadest measure -- U-6 -- fell 0.2% point m/m to 7.7%.  Both Civilian Employment and Labor Force rose.  The Labor Force Participation Rate jumped to 61.6% from 61.4%, after having been in a downtrend since November 2025.  The increase could reflect the small sample bias of the Household Survey.  So, an upturn has to be confirmed over the next few months.  However, it raises the possibility that an improving labor market is encouraging people to resume looking for jobs.

Besides the Payroll strength, the 0.1 Hour increase in the Nonfarm Workweek to 34.4 Hours shows better activity in the economy.  Total Hours Worked (THW) rose 0.3% m/m in August, putting it 1.8% (annualized) above the Q226 average.  THW rose 1.2% (q/q, saar) in Q226.

The 0.3% m/m increase in Average Hourly Earnings (AHE) in August supports the Fed's view that the labor market is not producing inflationary pressures.  AHE has averaged 0.3% m/m since the start of 2025.

Trump's call for the Fed to lower the funds rate threw another wrench into the monetary policy debate, doubling down in a sense on Treasury Secretary Bessent's previous announcement of a shift out of long-dated government financing.  Trump's call is puzzling, since it is a widely held belief that Presidential jaw-boning could backfire by pushing Fed officials to act in an opposite way to assert its independence.  Perhaps Trump wants to disassociate himself ahead of the midterms from a tightening decision that may happen this month.  Whatever the motivation, his jaw-boning is not likely to have an impact on the Fed.  Fed officials' views of the economy should be the deciding factors.

 

 

 

 

    

Warsh and Upcoming US Economic Data

The stock market may stay range bound this week, as key US economic data are not expected to change the overall macro picture.  The data are expected to be consistent with the broad outline of the economy described by Fed Chair Warsh at the Jackson Hole Conference last week -- solid labor market and strong manufacturing sector.  Upcoming inflation data could be more important for the Fed.

The Fed's main focus is bringing inflation down to its 2% target, according to Warsh.  He said the Fed will "have work to do" if it does not have confidence that underlying inflation is clearly moving in the right direction and with sufficient speed.  This comment does not guarantee a September rate hike, but suggests upcoming inflation data could trigger one.  The August inflation data will be released September 11 (CPI) and September 30 (PCE Deflator).   The FOMC Meeeting will be on September 16-17.

While Warsh reaffirmed the PCE Deflator as the main measure of inflation for the Fed, he emphasized that the Fed's focus is on the underlying inflation trend -- defined as the "generalized change in prices in the economy, unaffected by idiosyncratic factors."  He mentioned, perhaps for the first time by a Fed official, that more than 50% of the components of the PCE Deflator show increases above 3% over the past 12 months.  The market (and Fed) will likely focus on dis-aggregating upcoming inflation data this way to help judge whether the underlying trend is moving down.  

As for this week's economic data, Warsh reiterated the Fed's view that the labor market is "quite stable and consistent with full employment."  Consensus expects the August Employment Report to fit that description.   Nonfarm Payrolls are seen bouncing back to +45k m/m from -23k in July.  The risk may be for a larger increase, since the July decline reflected a drop in State & Local Government Education jobs that might have resulted from faulty seasonal adjustment.  More importantly, Private Payrolls are seen speeding up to +50k from +30k -- exceeding the prior +40k 3-month average.  (The Claims data suggest little change in the pace of Private Payrolls.)   

Consensus also expects the Unemployment Rate to edge back up to 4.2% from 4.1%, but this would keep it within its low range -- not changing the Fed view that the labor market is at full employment.  And, Average Hourly Earnings is seen speeding up a bit, but to a still below-trend 0.2% m/m from 0.1% in July.  Warsh acknowledged that wage inflation has been "moderate."  But, he did not take much comfort from this, saying that wages have not tended to be a good predictor of future inflation.  

Consensus looks for the August Mfg ISM to edge down to 55.3 from 55.6.  It would remain above the 46.3-53.0 range seen since early 2022.  Such a high level would be consistent with Warsh's view of the manufacturing sector.  He highlighted the strength of capital spending, much of which is tied to the AI build-out.  

Overall, Warsh's speech was essentially one more instance where he identified a problem -- too high inflation -- but did not decisively indicate a near-term rate hike.  Possibly, he does not yet have consensus among FOMC members to tighten policy.  His reference to the somewhat inflationary tilt in the distribution of price increases among PCE Deflator components as well as his sense that financial markets are not restrictive may suggest he is looking for more evidence to convince his colleagues.  Tracking Fed official speeches in coming weeks may offer clues if an absence of consensus in the Committee is the case or is ending.  Hawkish speeches should be expected by the three Committee members who dissented in favor of a hike at the July Meeting -- Cleveland Fed President Hammack (hawk), Minneapolis Fed President Kashkari, and Dalls Fed President Logan,   Fed Governor Waller (fence sitter) speaks on Thursday.  So does President Hammack.

Here is a breakdown of the FOMC Members in terms of hawk, dove and fence sitters, according to AI:

         Hawk                                Dove                Fence Sitter     

    Hammack                            Paulson              Barr           

    Kashkari                                                         Waller               

    Logan                                                              Bowman (slight dove)                                                     

    Warsh                                                             Jefferson       

    Cook (leans)                                                   Williams (slight dove)          

                                                                            Powell 

Fence Sitters would need to be convinced to tighten for there to be a rate hike.