The markets are moving in seemingly inconsistent directions -- with Treasury yields up despite a range-bound stock market and stronger dollar. However, this is essentially the scenario I laid out in my blog of September 18, where I argued that "early considerations suggest that most key US economic data in the next month or so will be strong enough to keep the risk of a December Fed rate hike alive in the markets, but not strong enough to eliminate all doubt. Treasury yields would likely stay in the recently higher range and stocks remain in their range."
This week's key data so far fit this expectation, although my expectation for Friday's September Employment Report (+140k Payrolls, 4.9% Unemployment Rate, but 0.3% m/m Average Hourly Earnings) argues for a relief rally in Treasuries and a pullback in the dollar. Stocks should rally, as well.
1. While the September Mfg ISM rose to 51.5, above consensus, it remained within the 48.2-53.2 range (average, 50.9) between January and August -- a period in which the Fed did not tighten.
a. The jump in the September Non-Mfg ISM to 57.1 from 51.8 in August also kept it within this year's range (51.8-59.5).
2. The +154k September ADP Estimate is a decent print, but the smallest m/m gain this year (156-257k between January and August).
a. There were 2 conflicting technical considerations regarding a forecast of the September ADP Estimate: /1/ The low +126k m/m increase in August Payrolls acted to hold it down, /2/ but, a weekly index maintained by the Phil Fed argued for a stronger print. The unknown was the strength of the ADP sample, itself. The fact that the September print remained on the low side of the range suggests that the sample reflected modest labor market fundamentals.
b. Recent history suggests Friday's September Payrolls will print below the ADP Estimate, the same as what happened in August. September and August Private Payrolls were both above or below the ADP Estimate in 3 of the past 4 years.
c. I"m estimating +140k for September Total Payrolls. Consensus is +172k.
Modest labor market fundamentals would be consistent with the sluggish pace of GDP Growth being projected by the NY and Atlanta Fed's nowcast models. The Atlanta Fed's forecast for Q3 Real GDP Growth is now only 2.2%, and may very well be lowered after today's wider August Trade Deficit is incorporated. The NY Fed's forecast also is 2.2% and will likely be lowered when it is updated on Friday. Its early projection of Q4 Real GDP Growth is now only 1.2%.
One piece of evidence that appears to contradict the idea of modest labor market fundamentals is the strength seen in the Conference Board Consumer Confidence Index, which is considered to be the consumer survey most reflective of labor market conditions. My guess is that the strength in people's perceptions of the labor market is showing up in an increase in labor market participation by those who previously stopped looking for jobs. If so, it should keep the Unemployment Rate about 4.9% -- the consensus estimate.
a. The Fed is likely to look past any strength in job growth if the Unemployment Rate remains near 4.9%. Yellen highlighted that labor market is sufficient to allow for good-sized job gains without putting much, if any, upward pressure on wage inflation.
Note that the risk for Average Hourly Earnings is an above-trend 0.3% m/m increase in both September and October because of calendar considerations. But, they should slow to 0.1% in November. While the y/y would climb in September and October to 2.6% -- the high end of the recent range -- it would fall to 2.4% in November. So, large gains in September and October should be discounted if not ignored.
a. Note that consensus is 0.3% m/m for September AHE.
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