The stock market may continue to improve this week, relieved that the September Employment Report raised the possibility of strong but non-inflationary growth. It suggests neither the Fed nor financial markets need to restrain the economy sharply to avoid a speedup in inflation. The sell-off in longer-term Treasuries can ease up.
There are still some potential hurdles this week, but they may be manageable. /1/ Any market impact from the Israeli-Hamas war should be short-lived if the scope of the situation does not expand. /2/ Even if the September CPI shows another high Core print, as consensus expects, last month showed that it may not translate into a high Core PCE Deflator -- the Fed's targeted measure. To be sure, a higher-than-consensus CPI can't be ruled out (nor can a below-consensus print). /3/ This week's release of the July FOMC Minutes and speeches by some Fed officials will likely reiterate Powell's hawkish message, particularly as it relates to the undesirability of strong economic growth. It is too soon to expect the Fed to alter the message coming out of the July FOMC Meeting. So, the markets may discount this Fedspeak.
The +336k m/m jump in Nonfarm Payrolls was the only strong element of the September Employment Report. The jobs surge boosted Total Hours Worked, so that the latter is up 1.5% q/q (annualized) in Q323 versus 0.0% in Q223 -- consistent with a speedup in Real GDP Growth in Q323 from 2.1% in Q223. THW's September level is 1.0% (annualized) above the Q323 average -- a good take-off point for Q423. So, at this point, there is no sign of an impending end to economic growth.
Other key parts of the Report were subdued and represented good news for the inflation outlook. The steady 3.8% Unemployment Rate stayed above its recent trend, the 0.2% m/m increase in Average Hourly Earnings (AHE) was below trend for the second month in a row, and the Nonfarm Workweek was flat. A steady Labor Force Participation Rate, after it had risen in August, offers hope that the economy's capacity to grow has expanded.
The sub-trend 0.2% m/m increase in AHE raises the possibility the economy doesn't have to weaken much to restrain inflation. To be sure, this is the narrowest of the three major measures of labor costs. And, it could be affected by compositional shifts. A slowdown in the Q322 Employment Cost Index, which is less affected by the composition and due in late October, would be welcome confirmation. The aggressive union actions in the automotive, health care and other industries, however, may become a factor in the inflation outlook, particularly if they have a broad influence on wage negotiations.
Nonetheless, the possibility that a sharp slowdown in economic growth is not needed to prevent a wage-price spiral could persuade the Fed to keep rates steady at the October 31-November 1 FOMC Meeting. A pause, if not partial unwinding, of the recent increase in long-term Treasury yields could be important in turning the Fed in this direction. Moreover, early evidence points to a slowdown in October Payrolls. The low ADP Estimate and sharp slowdown in Civilian Employment in September hint at such. Increases in Unemployment Claims over the next few weeks would, as well. The November Employment Report will be released after the next FOMC Meeting.
The 0.3% m/m consensus estimate of September Total and Core CPI looks reasonable, but there are risks on both sides. A 0.2% print can't be ruled out, but would require declines in some areas, such as Lodging Away From Home, only an uptick in Used Car Prices, and only a modest pass-through of higher oil prices to components like Airfare. A 0.4% print also can't be ruled out -- it's possible if many components don't slow from their August pace. The recent unwinding of some commodity prices is too late to show up in the September CPI, but is a welcome development for the inflation outlook.
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