Green Light For A Fed Rate Cut

The stock market should continue to climb this week, anticipating a Fed rate cut at the September 16-17 FOMC Meeting.  After the soft August Employment Report, this week's release of the August CPI should not derail the expected decision.  A rate cut, even a modest 25 BPs, would signal that the Fed will act to combat economic weakness ahead -- making the possibility of future economic weakness less problematic for stocks.

The consensus estimate of 0.3% m/m for Total and Core CPI looks reasonable, as the tariff impact should still be noticeable -- which the Fed could view as unavoidable but temporary.  A lower Core is not out of the question, nonetheless, but probably requiring a slowdown in Owners' Equivalent Rent to 0.2% from 0.3%.  Consensus has the Core's y/y steady at 3.1%.  However, a rounded-up 0.3% print could result in a dip in the y/y to 3.0%.  The markets may pay attention if this happens.

The August Employment Report already gave the Fed the excuse it needed to cut rates at the September 16-17 FOMC Meeting.  Besides soft job growth and an uptick in the Unemployment Rate, Total Hours Worked are down q/q in Q325.

The +22k m/m increase in Nonfarm Payrolls was the 4h month in a row of only a double-digit gain.  It was well below the 125k m/m increase consistent with a steady Unemployment Rate (and steady labor force participation rate).  The Diffusion Index (percentage of industries with job gains) stayed below 50%: 49.6% versus 48% in July).  There were declines in cyclical sectors, like Construction and Manufacturing, but also in Professional and Business Services (some of which conceivably could be tied to AI).

The uptick in the Unemployment Rate to 4.3% from 4.2% can be attributed to an increase in the Labor Force Participation Rate.  However, there were some troubling signs from the Household Survey.  The politically sensitive Black Unemployment Rate continued to climb, rising to 7.5% from  7.1% (mostly women).   And the Duration of Unemployment rose for the second month in a row.  The broadest measure of Underutilized Labor Force, U-6, rose to 8.1% from 7.9%.  This is its highest level since October 2021.

Average Hourly Earnings remained at trend, rising 0.3% m/m.  However, only 7 of 13 sectors had changes of 0.3% or less, compared to 11 of 13 in the Q225 average.  So, while the wage data have good news overall for the inflation outlook, there is not yet an all-clear.  Nevertheless, it should have assuaged some Fed concern about the potential for a wage-price spiral emanating from the tariffs.

With the Nonfarm Workweek unchanged from a downward-revised 34.2 Hours in July, Total Hours Worked were flat in August and are 0.5% (annualized) below the Q225 average.  As a result, the Atlanta Fed model's 3.0% estimate for Q325 Real GDP Growth continues to look too high.  However, if it is correct, it would be because of strong productivity growth -- a positive for Q325 corporate earnings and stocks.