Anticipating Jackson Hole

This morning at 10:00 a.m. ET, Chairman Powell delivered his highly anticipated speech from Jackson Hole. While the July 27 FOMC meeting minutes offered additional insight into the Committee’s assessment of weakening domestic conditions, already that commentary is three weeks old. The Jackson Hole summit will allow policy makers to extend a real-time update on the economy, policy, the future pathway for rates and risks to the outlook. The market was bracing for a more hawkish tone which would set the stage for a more aggressive rate move next month and going forward. Of course, a softer or more dovish tone will expectedly reinvigorate hopes of a lesser sized move just four weeks from now and more benign policy pathway into the end of the year.

Ahead of Powell’s comments, equities are trading higher with the Dow up 0.44% at 33,421 as of 9:19 a.m. ET.

Yields are trading lower with the 10-year down 1bp at 3.02% as of 9:19 a.m. ET.

Yesterday, GDP was revised up from a 0.9% drop to a 0.6% decline on an annualized basis in the second quarter, following a 1.6% drop in the first quarter. According to?Bloomberg, activity in the second three months of the year was expected to be revised up two-tenths of a percentage point to -0.7%.

In the details, personal consumption was revised up from a 1.0% increase to a 1.5% gain in Q2, still down, however, from a 1.8% increase in Q1.

Goods consumption, meanwhile, was revised up from a 4.4% decline to a 2.4% drop due to an upward revision in durable goods consumption from a 2.6% drop to a 0.1% decline and an upward revision in nondurable goods consumption from a 5.5% fall to a 3.7% decline.

Services consumption, on the other hand, was revised lower from a 4.1% gain to a 3.6% increase, still a three-quarter high.

Gross private investment, a gauge of business spending, meanwhile, was revised up from a 13.5% drop to a 13.2% decline, the largest quarterly decline since Q2 2020.

Fixed investment was revised down from a 3.9% decline to a 4.5% decrease in the second quarter, following a 7.4% gain the quarter prior.

Nonresidential investment, including office buildings and factories, was revised up from a 0.1% decrease to 0.0%, due to an upward revision to intellectual property investment from a 9.2% gain to a 10.0% increase. Equipment investment, on the other hand, was unrevised at a 2.7% decline, and structures investment was revised lower from an 11.7% drop to a 13.2% decline.

Additionally, residential investment was revised down from a 14.0% decline to a 16.2% drop, the largest quarterly decline in two years.

On the trade side, exports were revised down from an 18.0% increase to a 17.6% gain, still a two-quarter high, and imports were revised down from a 3.1% gain to a lesser 2.8% increase.

Finally, government consumption was revised up a tenth of a percentage point to a 1.8% decline, the third consecutive quarter of decline. Federal spending was revised down from a 3.2% decline to a 3.9% drop, and national defense spending was revised down from a 2.5% increase to a 1.1% gain, following five consecutive quarters of decline. On the other hand, nondefense spending was revised up a tenth of a percentage point to a 10.4% decline, and state and local spending was revised higher from a 1.2% decline to a 0.6% decrease in Q2.

Bottom Line:?While yesterday morning’s revisions indicated?a lesser decline?in the second quarter than originally reported, growth continued to retreat, marking six consecutive months of negative activity, the traditional metric used to measure recessionary conditions.

Also yesterday, initial jobless claims fell 2k from 245k to 243k in the week ending August 20, the second consecutive week of a decline. Jobless claims were expected to rise slightly to 252k, according to?Bloomberg. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell from 1.43M to 1.42M in the week ending August 13, a four-week low.

Additionally yesterday, the Kansas City Fed Index dropped 10 points to a reading of 3 in August, the lowest reading since July 2020. In the details of the report, the volume of new orders declined from -2 to -16, the number of employees dropped seven points to 10, and prices paid fell from 41 to 38. Additionally, the six-month ahead index fell from 26 to 10 in August, a two-month low.

This morning,?consumer spending rose 0.1% in July, less than the 0.5% gain expected according to?Bloomberg, and down from the 1.0% increase in June. Personal income, meanwhile, rose 0.2% in July, falling short of the 0.6% increase expected and following a 0.7% gain in June. Year-over-year, consumer spending increased 8.7%, and personal income rose 4.6%.

Adjusting for inflation, real consumer spending rose 0.2%, a three-month high, and real income increased 0.3% in July, the largest monthly gain in a year. Over the past 12 months, real spending rose 2.2%, a two-month high, while real income fell 1.6%, the fifth consecutive month of decline.

The PCE unexpectedly fell 0.1% in July, the first monthly decline since April 2020, and following a 1.0% increase in June. Year-over-year, headline inflation increased 6.3%, down from the 6.8% increase reported in June, albeit still near a four-decade high. Excluding food and energy, the core PCE rose 0.1% in July, a tenth of a percentage point less than expected and following a 0.6% gain in June. Year-over-year, core inflation increased 4.6%, down from the 4.8% annual increase last month.

Bottom Line:?The July PCE?report reinforces the notion that price pressures cooled in July, thanks in good part to a sizable retreat in energy prices. That being said, as seen in the CPI and PPI, outside of energy, broader price pressures remain with the headline rise still near a multi-decade high.?

For the Fed, this morning’s cooler-than-expected read on inflation?could?offer the needed cover to make a lesser sized move next month. This morning’s comments from Powell, however, will set the tone for whether or not the Committee will seize this opportunity to slow the pace of rate hikes and assess the impact of earlier Fed policy, or continue to move full speed ahead.?

Additionally this morning, the University of Michigan Consumer Confidence Index was revised up from 55.1 to 58.2 in the final August print, a three-month high. In the details of the report, a gauge of current conditions was revised higher from 55.5 to 58.6, and a gauge of future expectations rose from 54.9 to 58.0, a four-month high.

Next week?the economic calendar begins on Monday with a look at yet another regional manufacturing index, this one coming from Dallas and one from Chicago on Wednesday before the national ISM report on Thursday.?

Earlier this week, the Richmond Fed Index dropped deep into negative territory, reaching a two-month low, and the Kansas City Fed Index fell dropped 10 points to a reading of 3, while the Chicago Fed index unexpectedly rose for the month while maintaining a steep retreat from earlier peak levels.

The ISM, meanwhile, a gauge of national activity, has slowed for two consecutive months, dropping from a peak of near 64 in March of 2021 to just under 53 last month. Production remains positive but businesses are struggling to keep up with inflation as the cost to produce continues to rise. The ISM Manufacturing Index is expected to continue its retreat, dropping to 52.1 in the August report.

On Tuesday, a number of home prices indices will be released before the latest mortgage applications report on Wednesday.?While list prices do appear to be cooling somewhat relative to peak levels, with still a sizable disconnect between supply and demand, prices remain elevated on a nominal basis.?

Also on Tuesday, the latest read on confidence. Buoyed somewhat by lower gas prices in July, confidence still remains remarkably low. Nevertheless, in August, confidence is expected to increase modestly to over 97, which would mark the highest since June.?

The key report, however, will come on Friday with the latest look at the U.S. labor market. Nonfarm payrolls are expected to rise 300k in August following a 528k increase in July. The unemployment rate, meanwhile, is expected to remain at 3.5% for the second consecutive month, the lowest since February 2020, and matching a five-decade low. And finally, average hourly earnings are expected to increase 0.4% in August and 5.2% over the past 12 months, matching a similar increase in July.?

The employment report is one of the few key reports ahead of the Fed’s September rate decision. A stronger-than-expected report is likely to sway market expectations for a more rapid and sizable hike, while a softer report could undermine confidence in the need for more aggressive policy action in September. Recall, in July following a stronger-than-expected jobs report, yields spiked and investors at least temporarily redirected their expectations from 50bps to a 75bps hike up near 70% directly following the release. Currently, expectations are leaning albeit slightly, to a 50bp hike at 60%. Friday’s employment report, however, could serve to more aggressively tip the scale in one direction or the other.?

-Lindsey Piegza, Ph.D., Chief Economist