Stock Market Helped By Benign Data and Court Ruling?

The stock market may be buoyed this week by expectations of a Fed rate cut, as the August Employment Report is expected to be soft.  A consensus-like Report would likely pave the way for a Fed rate cut at the September 16-17 FOMC Meeting.  Also, the Appeals Court ruling against most of Trump's tariffs could mollify some of the markets' and Fed's concern about the inflation outlook.

Consensus looks for a sub-trend +78k m/m increase in August Nonfarm Payrolls, slightly more than the +73k in July,  Both are lower than the +115k that would keep the Unemployment Rate steady, assuming no change in the Labor Force Participation Rate.  Moreover, the Unemployment Claims data tilt toward an even smaller Payroll increase in August than in July.  Consensus looks for the Unemployment Rate to tick up to 4.3% from 4.2%, which is a reasonable expectation based on the Claims data and the rounding analysis discussed in last week's blog.  Consensus also expects Average Hourly Earnings to climb a trend 0.3% m/m, the same pace as in July.  A trend increase would argue against a wage-price spiral being triggered by tariffs.  The consensus estimate of a steady 34.3 Hour Nonfarm Workweek would allow for an increase in Total Hours Worked in August and Q325, suggesting that economic growth is continuing.

Other key data this week should support the idea of modest economic growth, according to consensus estimates.   The Mfg ISM is expected to edge up to 48.6 in August from 48.0 in July.  Both are associated with Real GDP Growth of 1.5-2.0%.  The Services ISM is seen up a bit, as well, to 50.5 from 50.1.    

In contrast to the expectation of modest job and economic data, this week, the Atlanta Fed Model's estimate of Q325 Real GDP Growth was strong, revised up to 3.5% from 2.2% (q/q, saar), thanks mostly to a shift from a subtraction to an add by Net Exports.  However, this shift looks questionable given the wider Trade Deficit in July.  The latter was caused mostly by a rebound in imports of industrial supplies, which could have been due to higher prices as the model apparently assumed.  Nevertheless, the 3.5% GDP estimate should be viewed with caution.  The Model's estimate is still early, and softer data for August and September would pull it down.  So, at this point, the Model's estimate of strong Q325 Real GDP Growth should not stand in the way of a Fed rate cut as long as the August Employment Report is soft.

As for inflation, the July PCE Deflator was benign and should not be an impediment to a rate cut, particularly considering tariffs had some impact that could be temporary.  The Core PCE Deflator rounded up to 0.3% from 0.27%.  And, the Market-Based Core PCE Deflator rose only 0.2%.          

The Appeals Court's ruling against most of Trump's tariffs needs to be affirmed  by the Supreme Court to significantly reduce the markets' and Fed's concern about their inflationary impact.  Even without the termination of the tariffs, Trump's policies and actions have mixed implications for inflation.  

/1/ Tariffs will almost certainly boost prices -- putting aside the possibility that the Supreme Court will affirm the negative ruling of the Appeals Court -- as will Trump's weak dollar preference.  However, there are caveats that could dampen their impact on prices.  If companies are slow to pass through the higher costs of imports, the price level will eventually fully reflect them but the boost to inflation -- the rate of change of prices -- will be modest and extend for a longer time than if the tariffs were fully passed through immediately.  In other words, US purchasing power will be reduced slowly.   The other caveat is that foreign companies could lower their prices to maintain market share in the US.  In this case, there would be no increase in inflation.

/2/ If Trump's appointees force the Fed to lower the funds rate and keep it low, the risk is the policy will overly stimulate the economy as well as depress the dollar in the FX market,  Both would lead to higher inflation.  There are two caveats:  /a/ The policy could backfire: longer-term yields could rise in response to the inflationary threat, thereby pulling down stocks.  Both developments would hurt economic growth.  /b/ The easy monetary policy would not be inflationary if the economy is in the process of slowing sharply or falling into recession.  

/3/  If Trump damages the independence of the Fed, inflationary concerns will likely boost longer-term yields and depress the dollar.  In the short run, the former would hurt economic activity while the latter would lift inflation. 

/4/ Deporting illegal immigrants reduces the labor force, thereby tightening the labor market and putting upward pressure on wage rates. 

The yield curve would signal whether a Trump-forced monetary policy change would likely boost inflation or not.  A steeper curve, with longer-term yields having risen, would signal an inflationary implication and, ironically, hurt interest-sensitive spending such as housing -- the sector Trump thinks his easy monetary policy would help.

Some of Trump's actions have reduced prices.  He put pressure on the Saudis to keep oil prices down.  And, the drop-off in foreign tourism to the US in reaction to his tariffs may have held down hotel rates.  He also is putting pressure on pharmaceutical companies to lower prescription drug prices.  All these efforts have the undesirable effect of reducing incentives for domestic production and innovation, but they do help hold down inflation.

Trump's actions are not the only government policies that boosted inflation.  Some of the higher prices hurting the consumer may have been triggered by the hikes in the minimum wage during the past few years.  These hikes probably played a role in the surge of restaurant prices, for example.    

 

 

 

A Shift in Risks -- What Will Data Say?

Stocks may continue to be supported if not move up in expectation of a Fed rate cut at the September 16-17 FOMC Meeting after Powell kept open the door, acknowledging a possible shift in the balance of risks toward a softer labor market.  What will be important is evidence from upcoming data that economic growth has slowed and the labor market has indeed softened.

The important Unemployment Claims data support the idea that the balance of risks has shifted somewhat toward weaker economic growth and softer labor market.  Both Initial and Continuing Claims are slightly above their July average.  So far, they suggest a smaller increase in Nonfarm Payrolls in August than in July (+73k m/m Total, +83k Private).  And, they hint at an increase in the Unemployment Rate, which would put it above its recent range.  Note that the Unemployment Rate almost printed 4.3% in July, having rounded down to 4.2% from 4.248%.  The unrounded July level suggests a greater chance for the Rate to tick up than down in August.  A soft August Employment Report, due September 5,  would likely pave the way for a September Fed rate cut.

Powell also affirmed that the Fed is targeting 2.0% inflation, arguing that low, steady inflation is required to sustain a solid labor market.  Maintaining this target suggests the Fed will be cautious in easing, cutting by only 25 BPs in September and possibly skipping a cut at the following FOMC Meeting to see how inflation evolves.  Although Average Hourly Earnings in the August Employment Report will not likely be the critical component regarding a September rate cut, a 0.3% m/m or lower print would support the idea that tariffs are not leading to a broader pickup in inflation while a higher print could raise some doubt about this idea.

This week's release of the July PCE Deflator is expected to be a bit on the high side, up 0.3% m/m for Total and Core.  The y/y would rise for both.  High prints would not likely stand in the way of a September rate cut, as some of the increase is attributable to tariffs and could be one-off.  

Other data this week are expected to post modest gains, particularly after taking account of inflation.  July Personal Income and Consumption are seen speeding up to 0.4-0.5% m/m from 0.3% in June.  However, they would be up only slightly after adjusting for the expected 0.3% increase in the PCE Deflator.  July Durable Goods Orders are projected to decline sharply for the 2nd month in a row, likely resulting from a drop in aircraft orders.  The underlying Ex Transportation and Nondefense Capital Goods Excluding Civilian Aircraft are seen up slightly.  There is a risk the latter will rebound more sharply after falling 0.7% m/m in June.  The latter is a leading indicator of Business Equipment Spending, which Powell pays attention to.  But, a rebound should not get in the way of a September rate cut.

 

 

  

Jackson Hole Ahead, But What About Payrolls and Tariffs

The stock market will be focused on Fed Chair Powell's talk at the Jackson Hole Conference this week, looking to see whether he indicates a rate cut at the September FOMC Meeting is likely.  The Fed often has used this Conference to signal shifts in policy.  

The US economic data released since the July FOMC Meeting, however, has not been fully supportive of a rate cut.  The labor market has weakened a bit, seen by slightly higher Initial and Continuing Claims so far in August than in July.  While the large downward revisions in May-June Nonfarm Payrolls and modest increase in July painted a weaker picture of the labor market than did earlier data, the important Unemployment Rate remained in its low range.  Moreover, inflation has picked up, only in part a result of tariffs.  If Powell shifts away from a "wait and see" policy approach toward an easing, he probably will have had to canvass other FOMC members informally beforehand.  Keeping the "wait and see" approach while leaving open the door for an easing may be the most likely message in his speech.  Stocks may be disappointed with it, but any selling would probably be short-lived. 

Besides Fed policy, measurement of BLS Nonfarm Payroll data and the question of tariffs should continue to be a market focus.  Here are some thoughts regarding these issues: 

Accuracy Versus Timeliness in Payroll Report

Trump and his candidate to head the Bureau of Labor Statistics (BLS), E.J. Atoni, complain about the inaccuracy of the Nonfarm Payroll data.  There are two reasons why the Payroll data get revised each month.  First, BLS receives more survey responses after the first release.  Typically, about 2/3 of respondents file in time for the first Payroll release.  About 90% of respondents have filed by the time of the second revision.  Second, the seasonal adjustment process spreads some of the strength or weakness of the current month's Payroll data over the prior two months.  Their complaint focuses on the first reason.

Besides the monthly revisions, there is an annual benchmark revision.  The latter matches the level of March Payrolls in the latest year with the level measured by Unemployment Insurance data, which is not subject to sample error.  BLS will release an estimate of the benchmark revision to March 2025 on September 9.   

The trade-off between accuracy and timeliness in the Nonfarm Payroll data centers on whether a high degree of accuracy is more or less important than the usefulness of a timely print.  The US had decided that usefulness is more important, hoping that the estimation procedures to fill in for missing respondents will succeed for the most part in producing a near-accurate total.  The degree of success that it has had is debatable  The absolute average revision from the first to third print is 57k between 1979 and 2003 and 51k between 2003 and 2025.  In other words, a 100k first-print Payroll m/m increase, will likely end up about 50k or 150k after the two monthly revisions.  This could be important.  There has been more than one episode when Fed monetary policy would have differed if revised Payroll data had been the first print.

Trump's candidate is reported to have argued for the Payroll data to be released quarterly, presumably at the end of the subsequent quarter in order to get most of the responses for the third month of the prior quarter.  Doing so will likely make other labor market data more important for the markets and Fed.  These include the ADP Estimate and Unemployment Claims.  The latter is a universal count and not subject to sample error.  The BLS Household Survey presumably would remain monthly, since the data coming out of it, particularly the Unemployment Rate, is not revised.  Knowing the Unemployment Rate might be enough, since it would show (by decreasing or increasing) whether Payrolls are rising above or below trend.

Other US economic data could be difficult to measure without the monthly Payroll (and Average Hourly Earnings) data.   Labor Compensation in Personal Income is based on these data. 

 Trump's Tariff Policy And Causes Of Trade Deficit

Trump's tariff policy aims to shift production back to the US from abroad.  This shift will reduce the standard of living of the US, since it results in the loss of low-cost labor.  Domestic production is more costly than foreign production, otherwise domestic production always would have been dominant. 

Trump and others argue that foreign production is less costly because governments offer subsidies and hold down the value of the currency relative to the dollar.  The latter makes their exports cheaper in dollar terms, resulting in an on-going large trade deficit.  China is the main actor along these lines.  

There are others who argue that foreign governments are not the culprits behind the large US trade deficit. Instead, it is insufficient saving or over-consumption in the US.  This explanation carries a moral undertone, criticizing US behavior as spendthrift.  It implies that the US takes advantage of the global status of its currency to over-consume by running a perpetual trade deficit (perhaps underscored by the "strong dollar" policy of past Administrations). 

They base this argument on the national income identity that Domestic Saving equals Net Exports.  Negative Domestic Saving is associated with a Trade Deficit.  The Federal Fiscal Deficit is the main culprit of negative saving in the US.   If this is the real reason for the trade deficit (rather than the consequence of the actions of foreign governments), then Trump's tariffs are a clever way to solve the problem.  They increase US government revenue, regardless of who pays it, which increases national saving by reducing the Federal deficit.   And, they target and reduce the consumption of the goods (imports) that allow the US to over-consume.  

 

 

 

 

 

CPI, Labor Market and Compensation

The stock market rally should not be derailed if this week's inflation data match the consensus estimates.  Although consensus for the July Core CPI is a bit on the high side, it may be viewed by the market as not being high enough to worry Fed officials more than they already are.   The outcome of US/China tariff negotiations by the August 12 deadline could be more important.  Meanwhile, Unemployment Claims data may be adding to evidence of a softer labor market.

July CPI

Consensus looks for 0.2% m/m Total and 0.3% Core CPI for July, with the y/y edging up for both.  The estimate looks reasonable, with both upside and downside risk to Core.  Upside risk stems from a possibly bigger impact of tariffs than in June.  Also, seasonal factors switch to boosting from holding down some important components, such as Lodging Away From Home and Airfares.  And, New Vehicle Prices could move up as some discount programs ended.  Downside risk stems from a possible smaller impact of tariffs than in June and more discounting in response to soft consumption generally.  Also, Owners' Equivalent Rent could move down a bit from 0.3% to the lower 0.2% m/m trend seen in Primary Rent recently.

The market and Fed will probably be looking to see whether the components that seemed to be boosted by tariffs in June continued to rise sharply in July.  If they don't, the Fed's favorite view that the tariffs would only result in a one-time boost to prices would be supported.  This view is a reason why Fed officials would not be disturbed by a slightly high Core CPI.  From a market perspective, a consensus print would encourage expectations of a Fed rate cut at the September FOMC Meeting.

Unemployment Claims Data 

The latest Unemployment Claims data suggest a smaller increase in Payrolls in August than in July if Claims stay at these levels for the next few weeks.  Both Initial and, particularly, Continuing Claims are above their July averages in the latest week.

ADP Estimate Better Than Payrolls?

Aside from the inappropriateness of Trump's firing of the BLS director, the large revisions in Nonfarm Payrolls in May and June could make the markets pay more attention to the ADP Estimate of Private Payrolls.  The revisions brought the BLS prints significantly closer to the ADP Estimates for these two months (see table below).   

The ADP Estimate of August Private Payrolls will be released September 3 and the BLS Employment Report September 5.  The BLS estimate of the Payroll benchmark revision will be released on September 9.  The benchmark revisions will be incorporated into the Payroll data in the January Employment Report, due in February 2026.  

                                              Private Payrolls (m/m change, 000s)   

                        ADP Estimate        First-Print BLS        Latest-Print BLS         

    March               155                          209                            120

    April                   62                          167                            133

    May                    37                          140                              69          

    Jun                    -33                            74                                3                                    

    Jul                    104                            83                               83       

  Labor Cost and Productivity Data

The Q225 data on Productivity, Compensation/Hour, and Unit Labor Costs have mixed news for the economy and inflation fight:

 1. The trend in Productivity Growth is back to its modest pace of the 1990s.  Although it popped to 2.4% in Q225, it was largely a rebound from the -1.8% in Q125.  The volatility reflects the measurement problem stemming from the large swings in net exports in GDP.  The y/y of 1.3%, which eliminates this problem, is lower than the increases seen in 2024 and 2023 (see table below).  Adding the 0.4% trend in Population, trend GDP looks to be about 1.7%, at the lower end of the Fed's 1.7-2.0% estimate of longer-run growth -- a modest pace.

 2.  Compensation/Hour -- the broadest measure of labor costs -- rose about 4.0% both q/q (annualized) and y/y in Q225.  Both are below the paces seen in 2024 and 2023.  So, this is good news for the inflation fight and in line with the slowdowns seen in Average Hourly Earnings and Employment Cost Index.

 3.  Taking both Productivity and Compensation/Hour into account, however, the trend in Unit Labor Costs (Compensation divided by Productivity) has moved up.  The y/y increase was 2.6% in Q225, higher than the increases seen in 2024.  

From the Fed's perspective, the downtrend in Compensation/Hour suggests the Unemployment Rate is at a level that is holding down labor costs.  However, labor costs may have to move down even faster if the trend in Productivity, which the Fed has no control of, does not pick up. 

                                                             Q225                         2024        2023                                 

                                                    [ q/q % *    y/y %]         [Q4/Q4 % change]

Productivity                                    2.4           1.3                    2.7            1.9                                  

Compensation/Hour                       4.0           3.9                    5.2            4.2      

Unit Labor Costs                            1.6           2.6                    2.4            2.3      

 * annualized                           

             

A "Wait and See" Fed

The stock market will be entering the seasonally weak month of August amidst uncertainty about the next Fed move.  Fed Chair Powell said the Fed is in "wait and see" mode until the September 16-17 FOMC Meeting, waiting to see if upcoming data lean toward economic weakness or higher inflation.   

Powell said that monetary policy is balancing the risks attached to its two mandated targets -- Unemployment and Inflation, not GDP Growth.  So, the most important real-side data for the Fed will relate to the labor market -- particularly the Unemployment Rate.  On the inflation side, the Fed likely wants to see if tariffs boost prices just once and for all or trigger a cascading lift-off in prices.  

It is not clear that upcoming data will provide a clear enough picture for the Fed to change policy by the time of the September FOMC Meeting.  And, Powell may keep the balance of risks argument to keep policy steady then.  Arguably, the Fed is relying on a balance of risk reasoning to cover for its real concern about the politically sensitive inflationary consequences of the tariffs.  This concern would suggest a longer waiting period than just the time to the September FOMC Meeting.  

In any case, the July Employment Report may not have been weak enough to move the Fed toward an easing.  Although job growth remained below trend, the 4.2% Unemployment Rate stayed in its recent range and Total Hours Worked pointed to continued GDP Growth in Q325.  (Indeed, the Atlanta Fed Model's early forecast is 2.1% (q/q, saar) for Q325 Real GDP.)  Wage inflation was steady. 

Fed Chair Powell admitted that the US economy had slowed over H125.  However, he emphasized that despite the slowdown, the labor market remained solid -- evidenced by the still low Unemployment Rate.  To be sure, there could be a delay before slow GDP Growth results in an increase in the Unemployment Rate.  So, Powell risks being late in adjusting his view of the policy risks by downplaying GDP Growth. 

Nevertheless, steady Fed policy now may be appropriate because the underlying trend in GDP growth may have slowed.  So, what looks like weak growth, in fact, may be neutral.  From the stock market perspective, a slower trend in economic growth is bad for corporate earnings (a negative) but helps hold down longer-term yields (a positive).

The underlying trend in GDP Growth may have ratcheted down because Population slowed sharply, to 0.5% (annualized) over H125 from 0.8% over 2024 -- presumably because of the drop-off in immigration.  In terms of GDP, the slowdown in Population would need to be offset by increases in Labor Force Participation (share of population employed or unemployed and looking for a job) or a speedup in Productivity Growth to keep the trend in GDP Growth where it's been.  

A caveat: Labor Force Participation may be related to the strength of demand for labor.  When people see companies looking for workers, they may decide to enter or re-enter the labor force.  An increase in Participation would temporarily allow for a stronger-than-underlying pace of GDP Growth without sparking inflation.   Keeping monetary policy unchanged may not give this Participation response a chance to happen.   

Powell also may be too accepting of the 4.2% Unemployment Rate.  While the Unemployment Rate is historically low, it may be close to a level that could be viewed as dis-inflationary.  This is because wage inflation has been fairly steady.  Average Hourly Earnings rose 0.3% m/m on average in 3 of the past 4 quarters as well as in July.  The Employment Cost Index was steady at 3.6% y/y in Q225 but in a slight downtrend excluding incentive pay.  Compensation/Hour -- the broadest measure of labor costs -- will be released next week for Q225.  Nevertheless, a dis-inflationary level of the Unemployment Rate would be desirable if tariffs have more than a one-time impact on prices and would not argue for an easing in monetary policy.  Perhaps that is why Powell is satisfied with the level.