What's Important -- Impeachment Inquiry or Fundamentals?

The markets are not likely to be significantly affected by the news regarding the House's Impeachment Inquiry near term.  Most of it will likely be politically motivated and not offer a complete interpretation of the "facts."  The markets will probably see them as background noise, with the only important question being whether they change the odds of next year's Presidential election or perhaps of passage of the US/Mexican and US/Canadian trade agreements.  News regarding the US/China negotiations and key US economic data should be the main focus of the markets.

This week's key US economic data include the September Mfg ISM and Employment Report.

Consensus looks for a rebound in the September Mfg ISM to 50.4 from 49.1.  But, the evidence is mixed.  A variation of the Chicago PM and the Markit Mfg PMI argue for an increase.  They have relatively good tracking records.  The variation of the Chicago PM was correct in 6 of past 8 months.  The Markit Mfg PMI was correct in 5 of 8 months this year.  Most regional surveys point to a decline, however.  This is the case with the Phil Fed Mfg Index, correct in 6 of 8 months this year -- a good tracking record.  But, some, like the Richmond Fed Index, appear to be catch-up after they missed the decline in the August Mfg ISM.

Consensus expects a speedup in Nonfarm Payrolls to +162k m/m from +130k in August.  Continuing Claims point to a speedup, correct in 7 of 8 months so far this year.  This month, it is probably more important to look at Private Payrolls (Total less Government) than Total Payrolls.  Private Payrolls rose only 96k in August, well below the +179k prior 3-month average.  Whether a speedup is viewed as strong or weak could depend on how it compares with this 3-month average.

Total Payrolls could be boosted by the hiring of temporary federal government workers in preparation for the 2020 census.  They accounted for 25k of the 130k August increase.  While this was a large increase by the Census Department, it is well below the hiring pace seen in 2009 ahead of the 2010 census.  Then, about 100k census workers were hired in April-June.  So, it is conceivable that census hiring will speed up in September.

Average Hourly Earnings should be benign.  Calendar considerations suggest 0.1-0.2% m/m, which would push the y/y down to 3.1% from 3.2% in August.  Such a print also could be payback for the higher-than-trend 0.4% jump in August.  Consensus is +0.3% m/m (the same m/m increase as in June and July) and 3.2% y/y.

Meanwhile, the Atlanta Fed model's latest projection of 2.1% (q/q, saar) is slightly above the Fed's 1.8-2.0% estimate of the longer-run trend.  And, Friday's data on the Core PCE Deflator shows the y/y moving up toward the Fed's 2.0% target, but the m/m slowing.  The y/y is backward looking, so the recent slowdown is more significant.  Low inflation is seen in the decline in the University of Michigan 5-Year Inflation Expectations to 2.4% from 2.6%, as well.  The combination of near-trend real growth and low inflation keeps a Fed easing bias in place.  But, it does not scream for another rate cut.