Caution Ahead of Trump?

The stock market may experience bouts of profit taking into the new year, as it turns cautious ahead of potentially negative developments coming from the new Trump administration.  The threat of tariffs and possible retaliations are foremost among these risks. 

However, market pullbacks may be just volatility within a wide trading range for several reasons:  /1/ Some actions by the new administration, such as deregulation, could be market positive.  /2/ News reports indicate that Mexico has begun to stop immigrants at its southern border and that Canada has begun to better police its border.  Both developments suggest Trump may hold back from imposing tariffs on them.  /3/ US economic data are likely to continue to show moderate growth and inflation.  However, economic growth appears to be skewed toward high tech.  And, there are pockets and hints of softness elsewhere that should keep the door open for more Fed rate cuts ahead.  /4/ Q424 corporate earnings are expected to be strong.

Two important data releases this week are the December Mfg ISM and the weekly Unemployment Claims.  Consensus looks for little change in the Mfg ISM from 48.4 in November.  This level indicates sluggish manufacturing activity, but continuing growth in the overall economy.  The survey includes a measure of export and import orders, so could be an early indicator of any impact from the recently very strong dollar.  The survey showed little, if any, effect in November, as export orders improved while import orders softened -- contrary to the implications of the strong dollar (as well as the possibility that imports are being accelerated ahead of tariffs).  The official trade deficit data show both exports and imports rebounding in November from October's declines.  On a y/y basis, imports are still running well ahead of exports (+9.6% versus +6.1%). 

The manufacturing sector is not only sluggish but skewed toward high tech, according to the Fed's Industrial Production data (see table below).  Output has been falling overall with the major exception being high tech (computers, semiconductors and communication equipment).

The Unemployment Claims data have been mixed.  Initial Claims are down slightly so far in December, but within the range seen since September.  They show a leveling off of layoffs.  In contrast, Continuing Claims rose in the first week of December (latest week of data), after rising in both October and November.  They suggest a slowdown in hiring.  It is too soon to say what these data suggest about December Payrolls.  If they stay near the latest levels, they would suggest a smaller Payroll increase than the +227k m/m in November.

                                                                        (percent change)

                                                Aug to Nov (annualized)       Nov 23 to Nov 24

Mfg Output                               -4.0                                              -1.0                  

High Tech                                    4.7                                               7.4     

Motor Vehicles                           -9.1                                              -3.5 

 Other                                         -4.0                                              -1.0     

Fed on Hold, Washington Now The Issue

The stock market rally looks to be intact after last week's extreme volatility.  Although news commentary blamed the Fed for last Thursday's sell-off, the budget crisis was likely the real culprit.  The FOMC Meeting outcome was essentially as expected and arguably a market positive, while Trump's opposition to the proposed budget resolution was not on either count.  Although the budget issue was eventually resolved, Trump's opposition highlighted the possibility of more discord in Washington, which would not be good for stocks ahead.  In particular, the potential for a trade war between the US and its major trading partners could weigh on stocks at some point.

The bottom line from this week's FOMC meeting was not bad for the stock market.  The Fed's downshift in next year's projected pace of rate cuts should not have precipitated such a sharp drop in stocks.  First, it was widely expected.  Second, one reason for the downshift was the continuing strong US economic growth -- a market positive.  Moreover, Fed Chair Powell's comments suggest the Fed will act if needed to sustain the strong growth next year -- reducing downside risks in the outlook.  Along with the likelihood of policy easing by other central banks, the overall stance of monetary policy appears to be pro-growth globally.  

Although the Fed raised its inflation forecast a bit for 2025, Powell emphasized that officials are confident that the trend is down and that their 2% target will be met.  His comments suggest the Fed will continue to downplay outliers and quirks in inflation data, such as the tendency for start-of-year price hikes.  The modest 0.1% m/m prints for November PCE Deflator offers support for his outlook.

Despite Powell's insistence that policy is based on the economic outlook, the Fed's forecasts have little credibility.  They consistently failed to pick up the economy's strength this year.  Even the latest forecast of 2.4-2.5% for 2024 Real GDP Growth appears too low,  Real GDP Growth would be 2.7% in 2024 (Q4/Q4) if the Atlanta Fed's forecast of 3.1% for Q424 is right.  In the same vein, the Fed's projection of two rate cuts in 2025 shouldn't be viewed seriously.  Whether and by how much rates are cut will depend on how the economy evolves, which no one (including the Fed) knows for sure.  At this point, the significance of its rate projection is that monetary policy leans toward pro-growth, ready to ease further if the economy weakens.

Powell said that Fed staff has been working to determine the potential channels through which tariffs could impact the economy.  He admitted that the impact on inflation and growth is not clear, in part because it could depend on whether other countries retaliate.  Other issues are whether the tariff's impact on inflation would be one-off or sustained.  The continuing strengthening of the dollar is already an offset.  A trade war would be a problem for stocks, even if the effects on the economy are not seen immediately or turn out to be minor. 

 

 

 

 

This Week's FOMC Meeting

This week's FOMC Meeting should not derail the stock market rally.  To be sure, Fed Chair Powell has continued to state that monetary policy decisions are data dependent, and the latest data -- showing solid growth and slightly elevated inflation -- argue for steady policy.   (Note that this week's US economic data are expected to fit this description, including  stronger November Retail Sales, Industrial Production and Housing Starts, as well as a benign PCE Deflator).  However, the Fed's focus appears to be on next year, not the current state of the economy.  And, Powell has made clear that officials believe its policy stance is too tight, with the risk that growth will slow too much ahead.  So, there is a good chance the Fed will cut by 25 BPs to 4.5-4.75% at the Meeting, while indicating, most likely in Powell's post-Meeting press conference, that the solid growth we're seeing means the Fed can take its time in adjusting the funds rate down to a non-restrictive level.

The revisions to the Fed's Central Tendency Forecasts, including the "dot" charts, may point to fewer rate cuts in 2025 than they had in September.  At the September FOMC Meeting, a majority of participants expected the funds rate to end 2025 in the 3.0-3.5% range.  Upward revisions to forecasts of Real GDP Growth and Inflation, as mentioned in last week's blog, would support a less aggressive approach to easing policy.

Nevertheless, last week's inflation data contained elements that should give the Fed hope that its 2% inflation target will be met at some point.  Although the CPI rose a high 0.3% m/m in November, a couple of outliers -- Used Car Prices and Hotel Rates -- were responsible for preventing a 0.2% print.  More encouraging was the slowdown in Primary Rent and Owners' Equivalent Rent to 0.2%.  Continuation of these rent components at this modest pace would increase the odds that the Fed's target will be met.  Also, the share of CPI components with 0.3% or higher prints fell to 44% from 56% in October, still high but moving in the right direction.  

Not surprisingly, the markets did not pay much attention last week to a normally ignored data release -- the revision to Compensation/Hour in the prior two quarters.  This time, however, the revisions were important as they undercut concern about inflationary pressures stemming from labor costs.  Compensation/Hour -- the broadest measure of labor costs -- was revised sharply lower, pushing down Unit Labor Costs (see table below).  They now look to be running well below the paces seen in 2023 --  in 2023 (Q4/Q4) Compensation/Hour rose 4.8% and Unit Labor Costs rose 2.1%.  These revisions should be a relief for Fed officials and bolster their confidence that inflation is on a downtrend.

 Compensation/Hr  Unit Labor Costs

q/q saar y/y q/q saar y/y

Q324

Revised 3.1 4.3 0.8 1.3

First-Print 4.2  5.5 1.9 3.4

Q224

Revised 1.0 4.8 -1.1 2.2

First-Print 4.6 5.7  2.4 3.2

 

Recent Data Good for Stocks

The stock market should continue its rally into year end, even if the Fed does not cut rates at the December 17-18 FOMC Meeting.  Economic growth is solid and inflation is somewhat elevated, which are market-positives despite the possibility of steady Fed policy.  In addition, potential negatives stemming from Trump's tariff threat are too far ahead to pose a near-term problem for the market (but this could change in Q125).  And, there is still a possibility that Mexico or Canada may agree to Trump's demands regarding immigration and drug flows before the tariffs are implemented.

The November Employment Report did not change the story of solid economic growth and somewhat elevated inflation.  Smoothing out the impacts of weather and strikes,  Total Hours Worked look to be up 0.7% (q/q annualized) in Q424, which would a tad higher than the 0.6% in Q324.  If Productivity Growth is the same in both quarters, Real GDP Growth should be close to the 2.8% seen in Q324.  The latest Atlanta Fed model estimate is 3.3%.  Wage inflation remained somewhat elevated in November.  The 0.4% m/m increase in Average Hourly Earnings matched the higher pace seen since August.  AHE probably have to trend at 0.3% or less to be consistent with the Fed's 2% inflation target.  A positive is that the unrounded increase in AHE was 0.37% in November, down from 0.42% in October.  

The Fed is likely to support a decision to keep rates steady by lifting its Central Tendency forecasts.  The latest data suggest /1/ the forecast of Real GDP Growth in 2024 would be hiked to about 2.7% from 2.1%, /2/  The forecast of the Q424 Unemployment Rate lower at 4.1-4.2% from 4.3-4.4%, and /3/ the PCE Deflator forecasts 0.1-0.2% points higher.  Stronger forecasts could be made for 2025, as well.

This week's inflation data are not expected to change the story.  Consensus expects the November CPI to post an increase of 0.2% m/m for Total and 0.3% for Core -- the same as in the prior 3 months.  The y/y would edge up to 2.7% for Total and be steady at 3.3% for Core.  To be sure, the same potential for lower prints exists as has been the case in the past couple of months.  It would likely require Owners' Equivalent Rent to slow to 0.3% from 0.4% and more subdued prints for volatile components such as Used Car Prices and Airfares.  These conditions were not met in the past couple of months.  Moreover, the dispersion of price increases moved up over the past couple of months, possibly resulting from higher wage inflation, and it will be important to see if it has continued to do so (see table below).

                                 Number of Major Core CPI Components 

                                   0.2% or Less                     0.3% or More

Oct                                    7                                         9                                       

Sep                                   9                                         7

Aug                                  13                                        3

July                                    8                                        8

June                                 13                                       3

May                                  11                                       5

Tariffs and Employment

The stock market's rally should not be derailed by this week's key US economic data if consensus-like data print.  Trump's vow to impose tariffs on Canada, Mexico and China will hover over the stock market in coming weeks.    However, for the moment at least, the headlines may not be all bad for the market.

Consensus looks for a benign November Employment Report, showing only a moderate bounce-back in jobs from the adverse effects of October's bad weather and strikes.  Nonfarm Payrolls are seen bouncing back to +183k m/m from +12 in October.  If the adverse effects amounted to about -100k in October, a full bounce back would result in a print over 200k.   So, the consensus estimate implicitly assumes some softness in labor demand outside of these effects.  The Claims data support such assumption, as they hint of weaker hiring more than offsetting fewer layoffs.  With the consensus estimate, the two-month Payroll average is close to 100k -- below the level consistent with a steady Unemployment Rate.  Nevertheless, the Rate is expected to be steady at 4.1%.  Average Hourly Earnings (AHE) could be the most important part of the Report.  Consensus sees a slowdown to the old trend of 0.3% from 0.4% in October.  If AHE does not slow, it would provide more evidence that wage inflation has become problematic.

It's too soon to say whether Trump's announced intention to impose 25% tariffs on Canada and Mexico and 10% on China will have a significant impact on US economic activity or inflation.  The tariffs may be bargaining tools to push these countries to clamp down on drug traffic and immigration to the US.  Presumably, the tariffs will not be implemented if agreement is reached in these areas.  Any news of a start of bi-lateral negotiations between any of these countries and the US will be a market positive.  The Mexican President's promise to stop immigrants from crossing her country and reports of US/Venezuelan discussions move in that direction.        

The direct impact of the tariffs are likely to be less than the stated increases.  Dollar appreciation against these three countries, which has begun already, will offset the inflationary impact.  These countries' currencies have depreciated a lot (the mirror image of the dollar appreciation) over the past few months and will likely depreciate further (see table below).  The timing of the currencies' depreciation is not coincident with the tariffs, but could allow exporters to absorb at least some of the tariffs instead of passing them through to prices.  

There are other potential consequences of the tariffs.  Some production could shift to the US or other countries, with inflationary consequences stemming from higher costs of production and/or greater pressure on labor markets.  The latter could be offset by weaker US exports to these countries, as the stronger dollar make them less competitive with the rest of the world.  On balance, the size of the impact of the tariffs on the US economy is not clear.  Regardless of the impact on the US economy, the stronger dollar lowers the dollar value of profits earned abroad by US companies.

                               Approximate Change in Value Against the US Dollar

                               Canadian Dollar        Mexican Peso        Chinese Yuan

                               -5% since Sept          -23% since May      -4% since Sept

 

 

A Positive Holiday Week?

The stock market has a couple of potential positives going for it this week -- an historical tendency to climb during the Thanksgiving Week and a possible below-consensus print for the Fed's favorite measure of inflation.  

The S&P 500 has tended to rise in the Thanksgiving Week, particularly on the day before and after the holiday.  This year, the most important US economic data for the week -- the October PCE Deflator -- will be released the day before, November 27.  Consensus agrees with Fed Chair Powell's seeming forecast of 0.2% m/m Total and 0.3% Core (see last week's blog).   However, there is a possibility of a lower print as a result of the different weightings in the PCE Deflator from those in the CPI.  In particular, Used Car Prices -- which jumped 2.7% in the CPI -- gets much less weight in the PCE Deflator.  Meanwhile, Apparel Prices -- which dropped 1.6% in the CPI -- gets greater weight in the Deflator.  To be sure, there are other differences between the CPI and PCE Deflator, as well.  So, a below-consensus print is not certain.

Unemployment Claims are sending mixed signals about the labor market.  Initial Claims are making new lows for the move down, indicating a decline in layoffs.  Continuing Claims, however, have moved up, suggesting some softening in hiring.  Although early, at this point, the Claims data suggest that November Payrolls could be on the soft side once the rebounds from bad weather and strikes (about 100k) are taken out.  Note that the best way to evaluate November Payrolls will be to average the m/m change with October's.  The November Employment Report is due December 6.

The combination of benign inflation and soft underlying job growth could keep open the door for a Fed rate cut at the December FOMC Meeting.  However, Powell's more cautious comments and the uncertainties of fiscal policy under the new Administration next year argue against one.

Regarding fiscal policy, the termination of Trump's Attorney General nominee, Gaetz, may have potentially positive implications for stocks.  Trump's acquiescence of the shift to another candidate raises the possibility that he will compromise on other policy decisions when faced with strong opposition.  As a result, some of his extreme election promises may not be as likely as feared, particularly those that would be harmful to the economy.

 

 

Fed Policy Shift?

The stock market may remain under pressure this week, as prospects of a Fed rate cut in December fade amidst typical year-end tax-related selling.  However, keeping rates steady is not necessarily bad for stocks, although it shifts the counter-cyclical burden to the markets.

Fed Chair Powell and other Fed officials continue to hint that rates will be held steady at the December  17-18 FOMC meeting.  Powell said "the economy is not sending any signals that we need to be in a hurry to lower rates."  He appears to be finally acknowledging that the economy's recent strength is sustainable, suggesting that the Fed's Central Tendency update at the meeting will show stronger GDP Growth as well as a higher funds rate for next year than in the September Central Tendency forecasts.  

Steady rate Fed policy may not be entirely bad for stocks.  It would preserve room for the rate to be cut when the economy in fact needs it.  This potential to ease represents an insurance policy for stocks regarding the economic outlook, which is a market positive.  

The markets, however, will play a greater role in determining whether financial conditions should be tighter to fight inflation or easier to fight the risk of recession.  The long end of the Treasury market will sell off if inflation and/or the economy look to be speeding up or it will rally if inflation/economic growth appear to be slowing.  The long end's actions could determine the path of the stock market, with stocks moving inversely with the long-end yields.  Handing over counter-cyclical policy to the markets may be the best approach for the Fed in the face of uncertain fiscal policy in 2025.  The markets will move more rapidly in response to events than would Fed monetary policy and be immune to political flak.

Between now and the December FOMC Meeting real-side economic data risk speeding up as they rebound from bad weather and strikes.  The markets may not react sharply to this strength,  however, discounting it as temporary.   What may be more important will be data on wages and prices, as measured by Average Hourly Earnings (AHE) and the CPI.  A slowdown would be a relief for long-term Treasuries and stocks, while a still-high pace could spark a sell-off.  There is no reliable evidence for November AHE.  There is a possibility that the November CPI could move down to 0.2% if the handful of components with large changes in October flatten out and Owners' Equivalent Rent returns to 0.3% from 0.4% in October.

Powell still does not acknowledge an inflation problem.  He downplayed the high October Core CPI and Core PPI, translating them into sub-3.0% y/y increases in the Total and Core PCE Deflators.  Citing y/y increases, however, is disingenuous since they are dominated by past inflation prints.  His figures imply 0.2% m/m for Total and 0.3% for the October Core PCE Deflator, the same as in the CPI.  These would not be good prints, as the Core would be elevated for the second month in a row.  To be sure,  perhaps he just applied the CPI m/m increases to the PCE Deflator, although his figures appeared to be presented as forecasts.  Smaller increases can't be ruled out because components are weighted differently in the PCE Deflator than in the CPI.  The PCE Deflator will be released November 27.

 

  

     

 

"Trumponomics" and the Fed

The stock market rally should continue this week, with possible help from a below-consensus October CPI.  Prospects of a pro-growth Trump economic policy should underpin the market's strength.  However, the policy could create problems down the road, as it generates inflationary pressures.  Indeed, labor cost inflation remains an issue, even though it has not gotten much, if any, mention in the press or by the Fed.

 "Trumponomics" will be an extension of Bidenomics in one way.  It will try to redirect the US economy to being more insular, using tariffs as one tool.  The goal in both overall polices is to bring manufacturing from abroad to the US.  This includes the operations of non-US as well as US companies.  In contrast to Bidenomics, Trumponomics presumably will not direct  investments to particular sectors, e.g., alternative energy EVs.  Instead, it will include tax cuts, deregulation, and presumably increased defense spending (also part of Bidenomics).  In both cases, the associated stimulus help propel US economic growth. 

The problem with both approaches is that the associated stimulus needs to crowd out other domestic spending if inflation is not to speed up, particularly when the economy is operating near full employment as it is now.  Higher inflation is one way the markets crowd out spending.  In the Biden case, the large influx of immigrants -- legal and non-legal -- mitigated the need for crowding out as it boosted the labor force.  This cushion may not exist under Trump, given his threat to stop or reverse the immigration.  As a result, inflation risks could be higher under Trump. 

To be sure, labor cost inflation remains high, even with the influx of immigrants.  Compensation/Hour -- the broadest measure of labor costs -- has sped up on a y/y basis for the second year in a row:  5.5% in Q324 versus 4.8% in Q423 and 2.4% in Q422.  Productivity Growth has been a partial offset, up 2.0% or more (q/q, saar) in each of the past four quarters.  Unit Labor Costs were up 3.4% (y/y) in Q324, versus 2.1% in Q423.  ULC rose 1.9% (q/q, saar) in Q324 (above the 0.5% consensus as was the risk), but they have tended to slow in the second half of the year so they could be understating trend.  They need to stay around 2.0% both on a q/q and y/y basis to be consistent with the Fed's inflation target.

Labor cost inflation along with increased stimulus could lead to a reversal of the Fed's policy easing at some point.  Higher longer-term yields will likely lead the Fed in efforts to restrain demand.  At this point, however, the Fed appears to be steadfast in its policy to lower the funds rate to what it views as a neutral level with regard to the economy.  In his post-FOMC news conference, Fed Chair Powell said that while the Fed is not on a preset course of easing policy, the current policy stance is in a very good place and that the Fed is trying to stay on an easing path that is neither too fast or too slow.  He said the Fed would slow the pace of easing if the rate is closing in on a reasonable estimate of a neutral level.  Fed officials are beginning to think of this possibility, but their baseline forecast is to continue to ease into next year.

Fed Chair Powell made several comments, nonetheless, that raise the possibility of a pause in rate cuts.  He acknowledged that the latest data have reduced the downside risks to the economy.  Some business leaders, he said, think the economy will be better in 2025 than in 2024.  He also acknowledged that wage inflation is currently above the pace consistent with 2% price inflation -- unless productivity remains strong.  However, he said the Fed does not see wages as a significant source of inflationary pressures now.  

Powell blamed housing rent for keeping price inflation above target.  Re-negotiated rent on long-term leases are seen as catching up to more recent rent hikes and that this catch-up will end at some point, suggesting the rent component of the CPI will slow eventually.  There was hope for the latter in the September CPI, where Primary and Owners' Equivalent Rent (OER) slowed to 0.3% m/m from a 0.4% trend.  A repeat 0.3% OER in this week's October CPI Report increases the risk of a below-consensus print.  Consensus looks for +0.2% m/m Total and +0.3% Core.  Moderation in airfares and apparel, both of which jumped in September, are likely needed for a below-consensus print, as well.

Powell made one comment at the news conference that allays concern about Trump's threat to become personally involved in monetary policy decisions.  Powell said he would not resign nor give up the chair of the Fed Board if ordered to do so by Trump.  Apparently, the law prevents Trump from firing or demoting him.  Powell's determination to stay would sustain the independence of the Fed, which is a positive for all the financial markets.

 

Elections and FOMC Meeting This Week

The markets will finally see the results of the US Elections and the November 6-7 FOMC Meeting this week.  They could trade cautiously into these events.  What may be most important for the markets is whether the Presidential Election is resolved without a problem or if neither party dominates all branches of government.  The stock market could have a relief rally in either case.

To be sure, the market impact (stocks, Treasuries and dollar) of the Presidential Election could depend on who wins. But both candidates have policy proposals that are problematic for the economy and markets.  The potential implementation of these proposals could restrain a positive market impact.  Questions will remain whether the proposals will be put into effect, either legislatively or by executive order. 

Some market commentary has attributed the recent sell-off in the long end of the Treasury market to the potential for a blowout Federal Deficit, particularly if Trump is elected.  This explanation, however, may not be entirely right.  If fears of a sharply higher Deficit (and the presumed inflationary result) were the reason, the dollar should have fallen in the FX market, as well.  This did not happen.  Instead, the dollar has strengthened.  An explanation for the combination of higher long-term yields and stronger dollar could be an increasing concern about Trump's proposed tariffs.  The latter would boost the dollar on the expectation of a smaller trade deficit.  The tariffs also would boost inflation initially and thus the long end of the Treasury market through higher inflation expectations.  (Note, that the direct impact of the tariffs on prices should unwind over time as the dollar strengthens.)   If Harris wins, these market moves could unwind --  which would be a positive for the stock market.

The Fed is likely to cut the funds rate by 25 BPs at this week's FOMC Meeting.  And, while Powell should keep open the door for further rate cuts, he may be more cautious about their timing.   The economy appears to be growing moderately, but wage increases may be somewhat problematic.  Total Hours Worked in October are above the Q324 average, despite being held down by bad weather and strikes in the month.  They suggest another quarter of good-sized GDP growth, particularly taking account of a post-hurricane/post-strike bounce-back in economic activity.  The renewed downtrend in Initial Unemployment Claims in the past two weeks also suggests economic growth is fine.  The Atlanta Fed model's early estimate of Q424 Real GDP Growth is 2.3% (q/q, saar).

On the wage front, Average Hourly Earnings (AHE)  rose an above-trend 0.4% m/m in October, the second high print in the past three months.  The y/y rose to 4.0% from 3.9% in September.  The broader Employment Cost Index, in contrast, had better news.  It slowed to 0.8% q/q in Q324 from 0.9% in Q224.  The slowdown fits with the Fed's expectation of a gradual deceleration in inflation.  The ECI averaged 0.6-0.7% before the pandemic.

This week's report on Q324 Productivity/Compensation/Unit Labor Costs, however, risks adding to the labor cost problem.  Consensus looks for Compensation/Hour -- the broadest measure of labor costs -- to rise by only 2.8%, which would be a good number.  But, the risk is for a larger increase.  To be sure, speedier wages would not be inflationary if offset by higher productivity growth.  And, productivity in Q324 stands to be strong.  Consensus looks for 2.3% (q/q, saar) Productivity -- in line with the strong 2.4% average since Q123.  And, the risk is for a higher print.  But, the balance of risks between Compensation and Productivity weighs toward a higher print for Unit Labor Costs (ULC) than the consensus estimate of 0.5%.   The recent trend in ULC has been down, with the y/y hitting a slight 0.3% in Q224, well below the 1.7% y/y increase in Q423.  Anything below 2.0% suggests slower price inflation ahead.

Election Uncertainty, Earnings and Key US Data

Corporate earnings and election uncertainty should continue to dominate the stock market this week.  Although consensus looks for moderate prints for this week's key US economic data, uncertainty about the labor cost measures could dampen the market ahead of the prints.  This week's key data will be the last Fed officials see before the November 6-7 FOMC Meeting.  It is unlikely the data will deter a 25 BP rate cut, but they could influence the Fed's forward guidance at the meeting.

One of the election issues relates to Fed policy.  Trump wants the President involved with FOMC rate decisions.  This relates to Fed independence and, if he wins, would be a negative for the dollar (offsetting in part the positive impact from the threat of tariffs) and lift long-term yields, as the risk would be for political considerations to restrain rate hikes when needed to curb inflation.  

Trump supporters say the Fed makes mistakes and thus needs to be changed.  Ironically, one mistake they accuse the Fed of is representative of what Trump wants.  They accuse the Fed of not tightening soon enough in 2021-22, which they say resulted in higher inflation.  Although Fed Chair Powell attributes the delayed tightening to forecasts of a "transitory"pickup in prices, it would not be surprising if political considerations played a role.  Powell did not want to act in a way that would run counter to Congress' legislative aim to boost the economy.

This is not to say the Fed never makes mistakes.  The Fed did make mistakes in 2007-08, which exacerbated if not triggered the Great Recession.  They made 3 major mistakes:  /1/ They analyzed the problem as an illiquidity issue at banks that required interest rate cuts.  Instead, the problem really was a lack of confidence among banks regarding the extent of subprime mortgage risk in their balance sheets.  A guarantee of bank liabilities for say 5 years by Treasury or the Fed to let them unwind their subprime positions likely would have solved the problem, similar to how the ECB tackled a bank confidence problem in 2011.  Lowering interest rates in 2007-08 boosted commodity prices, particularly oil, which hurt the consumer.  /2/ Fed Chair Bernanke and Treasury Secretary Paulson went on TV to say the US economy was heading into a big recession.  This destroyed business confidence, leading to massive layoffs.  /3/ The Fed did not save Lehman Brothers, punishing the company for its mistakes rather than acting to bolster market confidence (again not understanding the confidence problem).  By the way, this is not the conventional explanation for the Great Recession.

The Fed gets into perception trouble with its Central Tendency forecasts, which are often wrong.  In a sense, the forecasts are bound to fail because markets will move in a way to prevent them from happening.  For example, longer-term Treasury yields could fall if the Fed presents a weak economic forecast.  Lower yields would lift stocks, boosting consumption as well as housing demand.  A better approach could be to publish targets for GDP Growth, Unemployment Rate and Inflation rather than forecasts.  Then, the Fed could be held accountable without seeming clueless about the outlook.

Regarding this week's key US economic data:

Consensus looks for a benign October Employment Report.  Payrolls are seen slowing sharply to +140k m/m from +254k in September, while the Unemployment is seen steady at 4.1%.  Average Hourly Earnings (AHE) are expected to slow to the 0.3% m/m trend, after climbing 0.4-0.5% in the prior two months.  Unemployment Claims data support the idea of slower job growth in October.  In addition, there were 41k additional strikers (including Boeing workers) that will subtract from Payrolls but should be added back to get a clearer picture of the underlying demand for labor.  A 180k Payrolls gain would be somewhat high from the Fed's perspective and be consistent with a lower Unemployment Rate.  Strikers, themselves, do not affect the calculation of the Unemployment Rate, as they are not counted as unemployed.  There is no evidence regarding AHE -- unfortunate since this may be the most important part of the Report.

Regarding labor costs, consensus looks for the Q324 Employment Cost Index to rise 0.9% (q/q), the same as in Q224.  Even though high from a pre-pandemic perspective, a steady pace would be tolerable.  Evidence from AHE is mixed.  AHE sped up in Q324 after slowing in Q224.  In the past 6 quarters, ECI and AHE sped up or slowed together half the time.  The other half the speedup or slowdown in ECI matched that of AHE in the prior quarter, which suggests a slowdown in the Q324 ECI. 

            (q/q percent change)

            AHE            ECI

Q324   1.06              na

Q224   0.87               0.9

Q124   1.02               1.2

Q423   0.97               1.0

Q323    0.92              1.0   

Q223    1.2                1.0    

Q123    1.1                1.2

Q422    1.2                1.1

Q322    1.1                1.2

Consensus looks for 3.0% (q/q, saar) Q324 Real GDP, in line with the Atlanta Fed Model estimate of 3.3%.  A sub-3.0% print cannot be ruled out.  Consensus also looks for the October Core PCE Deflator to rise 0.2% m/m, smaller than the 0.3% increase in the Core CPI and better in line with the Fed's 2% inflation target.  A consensus print for the Core Deflator should be a market positive.

Fed Policy Intentions Helping Stocks

The stock market is likely to continue to grind higher this week, buoyed by the Fed's intention to cut the funds rate further even with above-trend economic growth in Q324.  Indeed, the Atlanta Fed model raised its estimate of Q324 Real GDP Growth to 3.4% from 3.2% (qq, saar) after the strong September Retail Sales report more than offset the implications of the soft Industrial Production and Housing Starts reports. However, the risk of higher wage inflation could become an issue ahead.

The strength of Q324 Real GDP does not appear to have stopped the Fed from planning to cut the funds rate further, albeit at a smaller 25 BP pace from the initial 50 BP cut.  To be sure, the model's estimate may be too high.  Other data show softening in manufacturing output (mostly outside of high tech), housing starts, and Total Hours Worked.  (The official report on Q324 GDP will be released October 30.)  Even if the model's estimate is correct, the Fed's intention appears to be to bring the funds rate down to its longer-term neutral level in order to sustain solid, non-inflationary economic growth -- as long as inflation remains near its 2% target.  The Fed presumably would stop easing if if looks as if the trend in inflation has turned up.

This presumed requirement suggests that the most important part of the October Employment Report could be Average Hourly Earnings (AHE).  It would be problematic if AHE does not fall back to its 0.3% m/m trend after rising 0.4-0.5% in August and September.  Away from the Report, the recent outsized wage gains in the Boeing and Longshoremen contracts are a concern, particularly if it influences other wage demands.  The Payrolls part of the Report should be comforting for the Fed, as the Unemployment Claims data suggest (at this point) a smaller increase than the large +254k gain in September.   The Report is due on November 1.

Fed officials, including Chair Powell, insist that their policy path is data dependent.  Powell says the way to think of data dependency is in terms of the impact on the Fed's outlook.  This approach has two problems, one from the perspective of  the markets and the other from the perspective of the Fed.  The markets' problem is that the impact on the Fed's outlook is not clear.  At the extreme, the Fed's rate decisions could seem arbitrary, with little if any relationship to the data.  The Fed's problem is that its ability to forecast accurately is not particularly good.  Officials could incorrectly dismiss a strong report as one-off, for example -- thus sticking with easing instead of holding back.  They will know whether the dismissal was correct from seeing future data releases, although the more immediate reaction of the longer-end of the Treasury market can offer a hint.  For example, a sell-off in the longer end on a Fed move would hint that the Fed overdid its policy move. 

 

Stocks To Slog Up in Face of Mixed Corporate Earnings and Fed Uncertainty

The stock market will likely slog up over the next few weeks, dealing with mixed corporate earnings reports and uncertainty regarding the Fed rate decision at the November 6-7 FOMC Meeting.  A 25 BP cut is probably the best bet as of now, despite the stronger-than-expected September CPI and Employment Reports.  Expectations of modest prints for this week's US economic data -- Retail Sales, Phil Fed Mfg Index, Industrial Production -- should support this view and help stocks.  However, the most important data for the Fed will likely be the October Employment Report, due November 1.  It is too soon for evidence on Payrolls.

Fed Chair Powell has said that while the intention is to bring the Fed Funds Rate down to a neutral level over time, the pace will depend on the impact of economic data on the Fed's outlook.  The most recent data will not likely derail the Fed's expectation of slower economic growth and lower inflation.

Consensus among market observers is that the September Employment Report and CPI were stronger than the Fed liked.  My view, as discussed in last week's blog, is that the Employment Report was not as strong as appears at first glance.  It is consistent with slower economic activity at the end of Q324 and leaves open the possibility this could continue in Q4.24.  It's unlikely that Fed officials would mention the mitigating parts of the Report in their upcoming speeches, but they should be aware of them.  This week's key US economic data -- September Retail Sales and Industrial Producton --are expected to post slight gains, supporting the idea that growth is moderating.

Although the September CPI showed a wider distribution of speedier increases among components than in recent months, the Fed could discount the speedups as being part of the "bumpy" ride they expect in the decelerating trend in inflation.  Moreover, the one piece of good news in the Report was the sharp slowdown in Owners' Equivalent Rent (OER) to a below-trend 0.3% m/m.  If OER's slower pace persists, the Fed's 2% inflation target may very well be achieved.

Looking ahead to nest year, four possible scenarios are conceivable:  

1.  Aggressive fiscal policy could boost inflation expectations and longer-term Treasury yields -- raising the possibility of renewed Fed tightening.   This would be a negative for stocks.  Both presidential candidates' policies have this potential outcome.

2.  The Fed policy easing in H224 boosts economic growth and inflation in H125, raising longer-term Treasury yields and pulling in expectations of further Fed easing -- a negative for stocks.

3.  Economic growth and inflation continue to moderate, keeping Fed rate cuts on track, positive for stocks.

4.  The US economy somehow slips into recession.  This seems unlikely, unless Fed policy shifts away from easing.

A Strong September Employment Report?

The stock market should climb  this week, after Friday's ostensibly strong September Employment Report dispelled fears of recession.  However, there was less strength than met the eye in the Report.  So, along with benign inflation data expected this week, the Fed should still be on an easing path.  Although Q324 corporate earnings are expected to slow, the slowdown may be temporary.

A large increase in September Payrolls and lower Unemployment Rate were the risk, given the recent decline in Unemployment Claims.  Unless the October Report (to be released prior to the next FOMC Meeting) is as strong, the Fed will not likely stop cutting rates in Q424.  The Fed apparently is focused on its expectation of future weakness stemming from prior tight monetary policy, not current economic activity.  Moreover, although the September Report shows a strong labor market, some parts of the Report suggest the headline Payroll print may overstate strength.  Some of the jobs gain may reflect a shift toward part-time workers.

The Household Survey shows that the number of part-time workers in nonagricultural industries jumped 527k m/m in September, after a string of sub-100k increases in prior months.  To be sure, this should be viewed as only suggestive, given the relatively small sample size of the Household Survey (on which the Unemployment Rate is based) compared to the Establishment Survey (on which Payrolls are based).

A shift toward part-time workers, nonetheless, could explain the dip in the Nonfarm Workweek to 34.2 Hours from 34.3 Hours in August.  But, the dip could be just noise.  It was 34.2 Hours in July, as well, although the industry breakdown was different from that of September.  The dip in Workweek in September did not appear to be mainly among Production Workers.  Their workweek was flat.

Total Hours Worked slipped m/m because of the decline in the overall Workweek.  The Q324 average of THW is only  0.2% (annualized) above the Q224 average, versus +1.6% (q/q, saar) in Q224.   This raises doubt about 2+% Real GDP in Q324.  However, THW may overstate weakness.  This is because THW for Production Workers rose 1.0% (q/q, saar) in Q324, not much below the 1.5% in Q224.  So, Q324 Real GDP Growth still may be in the 2.0% range.  The Atlanta Fed model's latest estimate is 2.5%, but does not yet take account of Friday's data.  The next model update is on Tuesday.

The 0.4% m/m increase in Average Hourly Earnings (AHE) after an upward-revised 0.5% in August is somewhat troubling.  The Q324 average rose 4.0% (q/q, saar), compared to the 3.4% increase by the Q224 average.  The y/y rose to 4.0% from 3.9%.  Nevertheless, large wage gains were not widespread, as fewer than half of the major sectors had large increases.  AHE rose 0.4% m/m or more (on average) in only 6 of 13 sectors in Q324, versus 4 in Q224.

Consensus expects a benign print for the September CPI.  It sees +0.1% m/m for Total and +0.2% for Core.  The risk would be for a higher print if Owners' Equivalent does not fall back to 0.4% m/m after speeding up to 0.5% in August.  Consensus looks for +0.1% m/m Total and +0.2% Core for the September PPI, as well.

Consensus estimates +4.6% (y/y) for Q324 S&P 500 earnings, down from 11.2% in Q224.  The macroeconomic background appears to support a slowdown in earnings.  On a y/y basis, Real GDP Growth slowed, oil prices fell and the dollar strengthened further (thereby making foreign earnings appear lower in dollar terms).  In contrast income from abroad could help profits this quarter.  Based on the European PMI, foreign economic activity improved on a y/y basis, although it slowed q/q.  Profit margins look to have been little changed.  A soft quarter of corporate earnings could be temporary, as consensus, at this point, looks for double-digit y/y returning in Q424 and continuing through 2025.

                                                                                                                                       Markit
                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level) 

Q123            2.3                -19.5                +3.0                              4.5           5.5               47.9  

Q223            2.8                -32.0                 +0.5                              4.4           5.2               44.7

Q323            3.2                -12.0                 -2.5                               4.3           4.4               43.2

Q423            3.2                -12.0                 -2.5                               4.3           3.9               43.8

 

Q124            2.9                +14.0                  0.0                              4.3           3.8               46.4

 

Q224            3.0                  +2.5                +3.0                              3.9           3.4               46.3 

 

Q324            2.6                  -6.0                 +2.5                              3.8           3.3               45.3                                                      

                                                                           

* Based on the Atlanta Fed Model's latest projection of 2.5% (q/q, saar).

 

How Important Are Upcoming Key US Economic Data?

The stock market should have no problem with this week's key US economic data -- if the data print close to the consensus estimates.  They would show a moderately growing economy, without putting undue stress on the labor market or lifting inflation.  Stronger-than-consensus data could lower market expectations of the size of the next Fed rate cut, and vice versa.  However,  the Fed will see another month's data before it meets again.  So, this week's releases lose some significance.  Away from the data, the stock market has major support behind it by the fact that central banks around the world are shifting to pro-growth policies.   China joined the Fed last week in monetary policy easing, and the ECB should soon do so, as well (meeting on October 17).   Market pullbacks on disappointing data (particularly in this seasonally weak period) could be buying opportunities.

Although US economic data may influence the Fed's decision on the speed of policy re-calibration, it will probably not stop the process.  The Fed's focus is on future economic activity.  Paraphrasing Chicago Fed President Goolsbee's recent comment, the economy will slow sharply ahead if the Fed does not lower the funds rate quickly.  This may not be a majority opinion at the Fed, as other officials have indicated a more cautious approach to easing.  However, the data may have to be particularly strong to preclude another 50 BP cut.  How the longer-end of the Treasury market behaves could influence the Fed's decision, as well.  Longer-term yields already have moved up a bit after the September funds rate cut.  If they move up more sharply, the Fed could settle for a 25 BP rate cut.

Consensus estimates for this week's key US economic data -- September Mfg ISM, August JOLTS and September Employment Report -- should keep a 50 BP rate cut in play:

Consensus looks for a steady 47.2 Mfg ISM.   The Index would remain below the 48.8 Q224 average, signaling a sluggish manufacturing sector.  

Consensus expects the JOLTS data to show little change in Job Openings in August, 7.65 Mn versus 7.67 Mn in July.  This would keep Openings in line with pre-pandemic levels, indicating that the post-pandemic excess demand for labor indeed has been eliminated.  The Fed views elimination of excess demand for labor as a way to hold down wage inflation without having layoffs lift the Unemployment Rate.

Consensus expects the September Employment Report to look similar to the August Report.  Nonfarm Payrolls are seen rising 145k m/m, versus 142k in August.  The Unemployment is expected to be steady at 4.2%.  And, Average Hourly Earnings (AHE) are back to a 0.3% m/m trend, after volatility in June and July (0.2% and 0.4%, respectively).  

The risk is for Payrolls to climb by more than the consensus estimate, based on the Unemployment Claims data.  Both Initial and Continuing Claims fell below July levels in August.  However, Payrolls may have to have to climb substantially, say 200k+ m/m, to raise doubt about a 50 BP rate cut.

The risks for the Unemployment Rate, are mixed.  There is a possibility of a decline, as the consensus Payroll estimate is above the 125k m/m pace consistent with a steady Unemployment Rate (assuming steady Labor Force Participation Rate).  In contrast, the Labor Force Participation Rate could resume climbing after it stabilized in August.  A higher or steady Unemployment Rate stemming from an increase in the Participation Rate would show the economy has more room to grow without stirring inflation.  Unfortunately, there is no reliable evidence regarding the m/m direction of the Participation Rate or Unemployment Rate. 

There is no reliable way to predict AHE, as well.  AHE has been in a tight 0.2-0.4% m/m range since March 2024, average 0.3%.  The same is true for all of 2023.  As long as AHE does not break to the upside of this range, it should not be a problem for the Fed.

The Atlanta Fed model still estimates Q324 Real GDP in the 3% (q/q, saar) range.  Its estimate was raised to 3.1% from 2.9% after the last couple of weeks' data.  Consumption was revised down sharply, but upward revisions in exports and inventory investment more than made up for it.  There is a possibility, however, that the downward revision to Consumption was underestimated and the upward revision to Net Exports overestimated.   Nevertheless, a near-3% pace is above trend and should be accompanied by good-sized increases in jobs.  At this point, it also suggests strong productivity growth, which should help hold down inflation.

Range-Bound Stock Market This Week?

The stock market may be range bound this week, as there are few data releases and the major indices are at or near record highs.  Although the market should be underpinned by the Fed's intention to lower rates further, there could be caution ahead of historically seasonal weakness in early October.  Also, key US economic data in early October may dampen expectations for the pace of future Fed easing.

The Fed expects to cut another 50 BPs by year end, another 100-150 BPs in 2025 and 50 BPs in 2026.  The funds rate would level off between 2.6% and 3.6%.  This week's US economic data are not expected to be a problem for this plan, but there could be problems in the following week.

The Fed appears determined to "recalibrate" the stance of monetary policy, based on Fed Chair Powell's comments at his post-Meeting news conference.  He said policy needs to be adjusted to reflect a  labor market that is no longer very tight and inflation that is close to target.  This sounds like a policy path that is set regardless of unwelcome surprises in economic data.  However, Powell said the pace of the re-calibration will depend on incoming data.  He may repeat all this in a speech this week (Thursday).

What seems to be important is whether and by how much upcoming data change the Fed's outlook -- not what the data say about the current state of the economy.  Unfortunately, it may be more difficult for market participants to ascertain the data's impact on the Fed's outlook than what they mean for the current economy.  Perhaps it will take substantial unfriendly data surprises to change the Fed's policy intentions. 

Powell indicated that what matters most are the paths of the Unemployment Rate and inflation -- the two mandated measures against which Fed policy is judged.  If economic growth is stronger than the Fed's published forecasts, it may not matter as long as the Unemployment Rate remains little changed from current levels.  This could be the case if potential growth is higher than the Fed's estimate of 1.7-2.0% longer-run growth.  With Powell repeating that the Fed expects housing rent to come down over time, small upside deviations in upcoming inflation data may be ignored by the Fed, as well.  The market and Fed are likely to take a consensus 0.2% m/m print for the August PCE Deflator in stride.

The Fed's projection of Real GDP Growth of 1.8-2.3% over the next three years is in line with its estimate of the longer-run trend, which may be "solid" as Powell says but is not especially conducive to strong earnings growth.  Like all long-term forecasts, though, these have to be taken with a grain of salt.  They may be meant to justify continued monetary policy easing rather than be a realistic forecast.

Why the projected rate cuts shouldn't lead to a significant speedup in GDP growth is a question.  Perhaps the Fed could justify it by saying the easing just offsets the lagged restraint of earlier tightening.  Or, it's possible that bad fiscal policies in a new Administration could restrain growth at the same time monetary policy is lifting it.  Arguably, the opposite happened in the past couple of years, with stimulative fiscal policy offsetting tighter monetary policy (although the Fed would never admit to this).  

The dubious accuracy of these forecasts is apparent in the downward revision of the 2024 Real GDP forecast to 1.9-2.1% from 1.9-2.3% made in June.  With H224 Real GDP Growth at 2.2% and the Atlanta Fed model estimate of Q324 Real GDP at 2.9%, there needs to be a sharp slowdown in September and Q424 to match the Fed's forecast for the year.  Perhaps, a protracted Boeing strike will do the trick.  There would be a sharp rebound in GDP once the strike ended, however.  

The latest Unemployment Claims data argue against a late-summer slowdown.  Initial and Continuing Claims fell further below the August levels in the latest week, despite the possibility of a post-holiday rebound.  At this point, they suggest a speedup in September Payrolls (due October 4), which could dampen expectations of future Fed easing.

A Friendly FOMC Meeting?

The stock market should continue to recover this week, even if the Fed cuts the funds rate by only 25 BPs.  This is because in addition to the rate cut it is very possible the Fed will signal more monetary policy easing in the rest of the year.   Moreover, the revisions to the Central Tendency Forecasts should be market positive.  And, there is a reason to think that the Fed's estimate of longer-run economic growth is too low, although it will not likely be changed at this meeting.  Putting aside specifics,  since the purpose of the easing would be to sustain solid economic growth, this policy background is an important positive for stocks.  

The Fed's signal of future rate cuts would be in the Central Tendency Forecasts and "dot" plots.  The latest Forecasts, made in June, showed the funds rate being cut to 4.9-5.4% by Q424, compared to the current range of 5.25-5.5%.  The updates will likely move this forecast down to 4.5-4.75% -- implying another 50-75 BPs in cuts over the two remaining FOMC Meetings this year.   The June "dot" plot put the median forecast at just above 5.0%.  This, too, is likely to move down to under 5.0%.

Updates to the economic components of the Central Tendency Forecasts should be stock-market positive:

1.  The forecast for Real GDP is likely to be raised to around the current upper estimate of 2.3%, as the H124 actual pace is 2.2% and the Atlanta Fed model estimate of Q324 is 2.5%.  The June range is 1.9-2.3%. 

2.  The Unemployment Rate forecast may be raised a bit.  In June, the forecast was for the Rate to be 4.0-4.1% in Q424.  It was 4.2% in August.  An upward revision could reflect expectations of increased labor force participation rather than weaker economic growth.

3.  The inflation forecasts could be lowered.  The June forecasts are 2.5-2.9% for Total PCE Deflator and 2.8-3.0% for Core PCE Deflator.  In July, the y/y was 2.5% for Total and 2.6% for Core.  They will move down more if they print less than 0.16% m/m from August through December.

Although the 1.7-2.0% estimate of the longer-run trend in Real GDP Growth is not likely to be changed at this meeting, this possibility may become an important focus either in the markets or at the Fed.  With US Population Growth at 1.2% and Nonfarm Productivity possibly continuing to exceed 1.0%, the longer-run trend in GDP could be in the 2.0-2.5% range.  A rising Unemployment Rate while Real GDP Growth is in the 1.7-2.0% range would suggest a higher range for the longer-run GDP trend than now estimated by the Fed.  If the Fed recognizes this, officials are likely to be more comfortable, if not more aggressive, in cutting rates.

On the data front, it is noteworthy that both Initial and Continuing Claims remained below their July average in the latest week.  It is possible that labor market weakness has bottomed.  Consensus looks for modest increases in August Retail Sales, both Total and Ex Auto.  This would still indicate a solid consumer after Sales jumped in July.

 

 

A Fed-Friendly Employment Report

The stock market may try to stabilize this week, after it seemed to overreact to Friday's Fed-friendly August Employment.   The latter points to near-trend economic growth with little wage pressures, arguing for a measured 25 BP rate cut at the September 17-18 FOMC Meeting (as well as keeping the door open for more cuts in Q424).   This macroeconomic/policy background remains positive for stocks.  

To be sure, some market participants are concerned that a 50 BP rate cut is needed.  Disappointment that the Employment Report did not give unequivocal support for this size cut may have been a factor behind Friday's sell-off.  There could be disappointment again this week, since consensus expectations for August inflation data, if correct, may not be soft enough to satisfy market participants hoping for a 50 BP rate cut.  However, the underlying inflation data should be negligible and not be a problem for the Fed or markets.

The August Employment Report contained an almost ideal set of data from the Fed's perspective:

1.  The 3-month average of Payrolls is 116k m/m -- close to the +125k m/m pace that is consistent with a steady Unemployment Rate.  The +142k increase in August was likely in part a rebound from a negative weather impact in July.  The July-August average (+116k) about equals the June pace (+118k).

 2. With the Nonfarm Workweek recovering, Total Hours Worked rose to a level that is 0.8% (annualized) above the Q224 average -- supporting estimates of about 2.0% Real GDP Growth (taking account of productivity).

3.  The dip in the Unemployment rate to 4.2% from 4.3% resulted from Civilian Employment outpacing Labor Force.  Both the Labor Force Participation Rate and Employment-Population Ratio were steady.  This is not a sign of a softening labor market.  To be sure, the broader U-6 Rate edged up, apparently because of an increase in  people working part time for economic reasons.  All other broad measures of unemployment edged down.

4. The speedup in Average Hourly Earnings to 0.4% m/m could be just an offset to the low 0.2% in July -- in other words, just volatility.  The latest 3-month average is a trend 0.3% m/m.  Last week's revision to Q224 Productivity/Labor Costs had good news for the inflation outlook.  Compensation/Hour -- the broadest measure of labor costs -- slowed to 3.0% (q/q, saar) from 4.2% in Q124.  The y/y fell to 3.1% from 3.8%.

This week's inflation reports are expected to be moderate -- but perhaps not low enough for those hoping for  50 BP rate cut.  Consensus looks for +0.2% m/m for both Total and Core CPI in August, with the risk of a lower print for Total.  The y/y should fall for Total but be steady for Core.  Nevertheless, inflation should be essentially a non-issue.  This is because inflation outside housing rent is flat.  Although some prices climb, others fall -- balancing out.   And, the bulk of the measured rent is imputed, not actually paid.

The more interesting report may be the weekly Unemployment Claims data.  Both Initial and Continuing fell in the prior week, but this could have resulted from Labor Day being in the week.  This holiday effect could reverse in this week's report, boosting Claims.  If it does, the two weeks' data should be averaged and compared to the July averages (232k Initial, 1.853 Mn Continuing).  If it does not, it would suggest that labor market weakness may have bottomed.

Stocks Helped By This Week's Key Data?

The stock market should be helped by this week's key US economic data, which are expected to recover to some extent from the prior month's prints that had sparked fears of recession.  Bad weather may have contributed to the earlier weakness.  Consensus prints would be strong enough to suggest no more than a 25BP rate cut at the September 17-18 FOMC Meeting. 

Consensus expects a rebound in the August Mfg ISM to 47.8 in August from 46.8 in July.  Although in the right direction, it would continue to indicate sluggish manufacturing as both remain below the 48.8 Q224 average.  In contrast, consensus expects the Services ISM to edge up to  51.5 in August from 51.4 in July.  The latter did not seem to be impacted much by bad weather in July and both the August consensus and July actual are above the 50.7 Q224 average.  The stock market should be buoyed by this evidence of an improving economy outside manufacturing.

Consensus sees the August Employment Report recovering modestly from the weak July Jobs Report.  Nonfarm Payrolls are seen rising 163k m/m after +114k in July.  Both are below the 168k m/m Q224 average.  The Nonfarm Average Workweek also is expected to recover a bit, to a trend 34.3 Hours from 34.2 Hours in July.  Total Hours Worked should rise by enough to put them above the Q224 average.

Consensus also expects the Unemployment Rate to edge down to 4.2% from 4.3%, remaining well above the 3.6% Q224 average.  Fed Chair Powell already pointed out that the increase in the Rate was largely a result of stronger labor force growth.  So, the high Unemployment Rate may be more a signal of greater capacity in the economy to grow, rather than a sharp weakening in the labor market.  Average Hourly Earnings are seen returning to their 0.3% m/m trend from 0.2% in July.  The y/y still would rise to 3.7% from 3.6% in July, but stay below the 3.9% Q224 average.  The Unemployment Claims are mixed for August, with lower Initial Claims signalling fewer layoffs, but a speedup in Continuing Claims suggesting soft hiring.  

Earlier in the week, consensus expects the July JOLTS data to confirm a softer labor market with a dip in Job Openings.  This could be impacted by bad weather, however, and conceivably tick up as the latter may have prevented job openings from being filled.  An uptick should be ignored for this reason.

Last week's Personal Income Report showed a strong consumer and moderate inflation, arguing for a 25 BP cut at the September FOMC Meeting.  The consumer began Q324 on a strong note, with Real Consumption 3.0% (annualized) above the Q224 average.  And, the 2.5-2.6% y/y for Total and Core PCE Deflator are not far above the Fed's 2.0% target, allowing the Fed to act to sustain economic growth.  

The Atlanta Fed model's estimate of Q324 Real GDP Growth was revised up to 2.5% from 2.0% as a result of these and other recent data.  This growth rate, if it holds up as more data come in, would be slower than the 3.0% Q224 pace but above the Fed's 1.7-2.0% estimate of longer-run growth.  It  argues against recession and for only a gradual pace of policy easing, the latter meant to ensure a continuation of moderate economic growth.

Fed Easing on Track, Fiscal Policy An Issue?

The Fed's implicit promise to ease monetary policy in order to sustain economic growth -- as long as inflation remains muted -- stands as a strong positive for the stock market.  However, some profit-taking could weigh on the market this week after the market rallied ahead of and on Fed Chair Powell's speech in which he finally confirmed a September rate cut -- a "buy the rumor sell the fact" pattern.  The market will probably now focus on whether and by how much the Fed will cut rates after the September FOMC meeting.  With the Fed now emphasizing risks to economic growth, real-side economic data should become more important than inflation data.  

Inflation data are still important, nonetheless, as they need to confirm their downtrend to satisfy the Fed and markets.  The consensus expectation of 0.2% for both Total and Core July PCE Deflator, due on Friday, should be acceptable and taken in stride.  Stocks would likely rally on a smaller increase.  The latter can't be ruled out.

The Fed's policy stance should restrain any downside risk stemming from policies of a new Administration, whether it be Democratic or Republican.  Many of the proposals relate to re-distribution rather than economic growth.  So, they may have little significance for monetary policy.  However, some policy proposals could be significant for the Fed at some point.

The Democratic proposal to hike the corporate tax rate may have macroeconomic effects.  If the tax reduces profits, it could dampen business investment as some projects become unprofitable.  If the tax is passed through to prices, there would be a temporary boost to inflation that would cut consumer purchasing power.  If the tax is pushed down to labor, resulting in lower-than-otherwise wages, consumer purchasing power would be hurt, too.  However, if, as theory says would happen, workers in non-corporate businesses also receive lower-than-otherwise wages, these companies could pass through the lower labor costs to prices, offsetting at least to some extent the hit to purchasing power from the tax.

Harris' plan to extend Biden's cap on drug prices would seem to help hold down inflation.  However, it may prompt pharmaceutical companies to raise prices on other drugs.  Also, it could lead to shortages and higher prices through a black market for the capped drugs. 

The Republican proposal to hike tariffs should boost prices, at least initially.  In principle, however, they should be offset by a stronger dollar so the boost may be less than expected.  Whether tariffs result in only a one-time increase in prices or feeds into a sustained increase in inflation may depend on whether wage rates move up in response.  This won't be seen immediately, but could make Fed policymakers cautious about the inflation outlook.

Trump's wish to participate in Fed rate decisions is not good.  Participation by a president risks preventing the Fed from tightening to prevent inflation, a politically unpopular policy.  This risk could undermine global confidence in the dollar, causing the latter to fall in the FX market.  This would be inflationary. Between a loss of confidence in the Fed's inflation-fighting ability and a weaker dollar, inflationary expectations would rise, resulting in a steeper Treasury yield curve (higher long-term yields) -- a negative for economic growth.

Both parties appear to want to increase the Child Care Credit.  This would boost consumer spending.  And, unless it leads to a significant increase in labor force participation, would need to be "crowded out" either by market moves or Fed policy if the economy is close to full employment.