Macro Market Notes Digest - July 2024

Welcome to the July digest of posts published on Macro Market Notes in 2024! I do publish summaries of blog posts on LinkedIn or Twitter right after I publish one, but this newsletter is another way to keep informed about my publications on Macro Market Notes or elsewhere.

In July I wrote about the June jobs report, the state of consumption, excess savings and core PCE inflation in June as well as the July FOMC meeting (before and after). And as per usual I finish with some final thoughts.

If you have feedback on any of the pieces outlined below, let me know in the comments or message me. Also feel free to reach out if you want to chat about a particular topic or if you know of professional opportunities that could be of interest to me.

The Monthly Digest

June Payrolls: A Turning Point? (July 5th)

A summary of this post was featured on LinkedIn News: Payrolls popped by 272K in May

Key takeaways:

• Payrolls growth momentum remains strong, and trends continue to run above the breakeven pace needed to keep the unemployment rate constant.
• The unemployment rate hit 4.1% as the labor force participation rate increased from 62.5% to 62.6%.
• The job-finding rate fell over the month to 42% with smoothed trends also declining below 50%. The unemployment rate consistent with recent job-separation and job-finding rates suggests a negative near-term outlook for the official unemployment rate.
• Wage growth remains elevated, with momentum in composition-adjusted average hourly earnings turning away from the pace consistent with 2% inflation and supported by a pickup in “Main Street” inflation expectations in Q2.
• Today’s data will make the Fed more aware of the potential of a larger-than-expected slowing in economic activity when assessing the inflation data to determine the start date of rate cuts.

June Personal Income & Outlays: Ever So Slowly? (July 26th)

A summary of this post was featured on LinkedIn News: Inflation slowed again in June

Key takeaways:

• Personal income growth out of wages and salaries decelerated somewhat in June. Household wage income growth now runs in line with the pace that’s broadly consistent with 2% PCE inflation over the medium-term.
• The stock of excess savings has NOT run out and continues to be a tailwind for consumption. Between May and June, it fell around $27 billion and equaled about $505 billion in June.
• In Q2 2024 headline consumption growth accelerated above underlying spending growth. Beyond Q2 headline spending will likely ease towards the pace of underlying consumption growth. But as the latter remains above its 2022 pace this does not signal that a large downshift in consumption is forthcoming in H2.
• Core services excl. housing PCE inflation, the Fed’s favorite gauge of underlying inflation, remains at elevated levels but continued to show a slowing in momentum. The central tendency of PCE inflation currently suggests underlying inflation at around 2.8%.
• Momentum across most underlying inflation measures is slowing towards target such that it makes a rate cut possible. But the different underlying inflation measures are now signaling a more scrambled picture and with solid underlying consumption growth rates this suggests that the Fed will likely be patient and await the July inflation data before making a rate cutting decision at its September FOMC meeting.

July FOMC Meeting Preview: It's Good to Wait (July 29th)

A summary of this post was featured on LinkedIn News: The numbers to watch this week

Key takeaways:

• Underlying PCE inflation trends remained relatively stable in June at above-target levels, at around 2.8% PCE inflation.
• As labor market activity has cooled, household wage income growth appears to have slowed recently to a pace that could over time push spending in line with 2% inflation. Real household spending, however, is still growing a strong pace.
• As the expected year-ahead real interest rate path remains restrictive and real economic activity levels remain strong, the FOMC will continue to be patient and wait for sustained weakening in inflation data before deciding to cut policy rates.
• I thus expect the FOMC to again decide to keep the Fed funds target rate unchanged at 5.25%-5.50%.
• The statement following the rate decision will signal a bias to lower rates at some point in the near future, but it will also emphasize uncertainty regarding the timing of this easing that will depend on the incoming data. I don’t expect the phrase “elevated inflation” to be dropped from the statement just yet.
• Trends in underlying inflation suggest Fed funds rate cuts could start at the September FOMC meeting. This is my modal expectation, but there’s a notable tail risk that the Fed will again not move in September.
• Conditional on a continued slow rate of progress in PCE inflation trends and solid real activity with a cooling but not deteriorating labor market, the Fed will only gradually be cutting rates beyond September with a total of 1-to-2 cuts in 2024.

July 2024 FOMC Meeting Postmortem (July 31st)

A summary of this post was featured on LinkedIn News: Fed says Sept. rate cut possible

Key takeaways:

• The FOMC again kept the Fed funds target rate unchanged at 5.25%-5.50%. Similarly, there was no change in the pace of reductions of the Fed’s holdings of Treasury and mortgage-backed securities
• The statement following the rate decision signaled a bias to lower rates at some point in the near future, as the Fed’s focus is now on both sides of its dual mandate.
• A September rate cut is the modal expectation, but there’s a risk that the Fed will again not move in September. In the former case, I expect 2 cuts in total for 2024, whereas in the latter I would expect at most 1 cut this year.

Final Thoughts

Over the past month the data indicated that labor market cooling is for real albeit unclear whether this is owing a reversal of labor market dynamics back to trend or an all-out deterioration. Meanwhile, household spending rebounded, and indeed was the main factor behind another above-trend GDP print in Q2, and PCE inflation data eased, but less substantially so than what we saw in the data releases in June. In fact underlying near-term trends in the PCE price data suggests that underlying inflation remains stubbornly elevated.

What that in mind one needs to realize that back at the June FOMC meeting, the Fed already projected in its Summary of Economic Projections (SEP) update a gradual adjustment process in the core PCE inflation. Many commentators criticized the Fed for it, but I start to think that the the less substantial progress over the past month kind of vindicates the Fed's view. Chair Powell's remarks after the July FOMC rate decision suggests that only data that really indicates a dynamic that goes against this SEP projection would keep the Fed from starting an easing cycle at the September FOMC meeting.

I am still of the opinion that inflation normalization will be a lot more bumpy than what most analysts seem to expect. And I also think the Fed is wary of it and initially will aim rate cuts to be mere dialing down of restrictiveness and nothing more, to ascertain that inflation trends indeed will be reset on a path towards 2% inflation. But the Fed also wants to preserve the current 'goldilocks' labor market dynamic. There are plenty of data releases between now and the September FOMC meeting that could suggest up- and downside risks relative to the June SEP Fed funds rate path of 2 rate cuts in 2024 starting in September. Continued stubbornly above-target inflation readings could mean no September cut and less cuts for this year. Labor market weakening beyond a cooling pace would mean more rate cuts for the year. I believe the former is a larger risk than the latter, but we shall see. It'll be a hot summer.

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