Macro Market Notes Digest - October 2024

Welcome to the October 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 October I wrote about the September jobs report, the September CPI and retail sales reports, trends in jobless claims in October and the state of consumption, excess savings and core PCE inflation in September. 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 know about professional opportunities that could be of interest to me.

The Monthly Digest

Sep Payrolls: Surging Into the Fall (Oct. 4th)

A summary of this post was featured on LinkedIn News: Hiring blows past forecasts

Key takeaways:

• Payrolls growth picked up again in September, with trends now close to the breakeven pace needed to keep the unemployment rate constant at current levels given higher-than-expected population growth.
• The unemployment rate eased to 4.1% as the labor force participation rate remained unchanged at 62.7%.
• The job-finding rate decreased over the month at 49% with smoothed trends at around 48%. The unemployment rate consistent with recent job-separation and job-finding rates continues to decline. Smoothed trends suggest that in the near term the unemployment rate will likely stabilize around 4.2%.
• Wage growth in composition-adjusted average hourly earnings remains elevated at paces inconsistent with both the 2% inflation target and near-term inflation expectations.
• Today’s data seems in line with the Fed’s outlook for the labor market and thus suggests a gradual easing of the future policy rate path.

Sep CPI & Jobless Claims Trends (Oct. 10th)

Part of this post was featured on LinkedIn News: Prices cooled in September

Key takeaways:

• The topline numbers of the September CPI report came in somewhat stronger than consensus expectations, with in particular core CPI inflation accelerating despite easing housing services inflation. Based on trimmed mean measures, core CPI inflation firming over the month was broad-based.
• Nonetheless, statistical nowcasts utilizing CPI trimmed mean inflation measures suggest underlying PCE inflation dynamics that continue to signal, for now, sustained inflation progress for the Fed.
• Initial jobless showed a large increase over the past week. This was for a notable part due to the impact of hurricanes on the Southeast, but other parts of the U.S. saw big increases as well.
• To assess the implications of jobless claims dynamics for the unemployment outlook, I compare initial claims with benchmark rates for initial claims at which the unemployment rate remains unchanged at last month’s rate given last month’s net hiring (excl. layoffs), breakeven payrolls growth and take up rate for claims.
• This comparison indicates that the labor market over the summer reached its limits in terms of its capacity to recycle initial jobless claimants back into new jobs. Since August, initial claims have eased below their claims benchmark rate. It likely means that?the labor market remains in a delicate balance around a 4.2% unemployment rate.

Sep Retail Sales & Jobless Claims Trends (Oct. 17th)

A summary of this post was featured on LinkedIn News: September's strong retail sales

Key takeaways:

• Retail sales for goods increased 0.3% in September, after being essentially flat in August.
• In inflation-adjusted terms retail trade excl. gas stations accelerated over the month on a three-month basis and real bar and restaurant spending surged even more on a three-month basis to the highest pace since November 2023.
• The strength in inflation-adjusted sales signals strong real spending growth for the upcoming September PCE and Q3 GDP reports, suggesting again above-trend economic growth in Q3.
• After a sharp rise in jobless claims for the week ending Oct 5th, claims for Oct 12th were more subdued at 241k (vs. 260k revised).
• Claims remain elevated though, partly due to continued impacts from hurricane Helene, especially in North Carolina. However, last week's high claims in California and Michigan also have persisted this week.
• The 4-week claims average has risen above the benchmark rate at which the unemployment rate stays flat at last month's value based on CBO's higher population estimates. This suggests that we'll likely see limited progress in reducing the unemployment rate this month.

Sep Personal Income & Outlays: Keep on Spending (Oct. 31st)

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

Key takeaways:

• Personal income growth out of wages and salaries stabilized at a pace not seen since Q3 2022. Household wage income growth continues to overshoot the pace that’s 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 August and September, it fell around $14 billion and equaled about $426 billion in September.
• As in the previous month, in September headline consumption growth ran well above its underlying spending growth. Over the coming months headline spending will likely ease towards the pace of underlying consumption growth. But the underlying pace of consumption spending itself also went up notably in September, likely due to strong household wage income growth and still sizeable excess savings. Consequently, do not expect a large downshift in consumption is forthcoming over the near term.
• The central tendency measures of PCE inflation are mostly at 2% on a six-month basis. However, these measures have been accelerating on a three-month basis since August and over an annual horizon underlying inflation still remains above target.
• The slowing in underlying inflation measures over the past six months means that Fed officials for now remain willing to continue to cut policy rates. However, given strong wage income and consumption growth rates as well as a recent pickup in underlying inflation momentum, the Fed will be very cautious in easing its policy stance beyond the upcoming November FOMC meeting.

Final Thoughts

Data over the past month indicated that although manufacturing is in a rough patch, the labor market is not collapsing, incomes of household are still growing at a solid pace and consumption spending remains really strong. Meanwhile, inflation progress has been satisfactory over the past six months, but momentum in core (services) inflation is turning upwards signaling that at the very least further disinflationary progress will be a lot slower.

Against this background, markets have repriced their expectations of the pace of policy easing over the next twelve months, bringing it more in line with the Fed's own policy rate projections laid out in the September SEP. These imply a further total 50bps of easing for the November and December FOMC meetings and while this is a good modal expectation for rate cuts this year, there clearly remains uncertainty about the pace of future easing:

• Given the potential impact of hurricanes Helene and Milton and the large scale strike at Boeing, the October jobs report may well give a distorted view on the state of the labor market. The Fed acknowledged that, with Governor Waller publicly stating these factors could knock 100,000 jobs off the October payrolls whereas the unemployment rate could show a modest tick up. However, it is by no means certain that impact of the aforementioned temporary factors will be that material. Using weekly initial claims data up Oct. 26th as well as updated JOLTS data into September, the first chart below indicates that averaged over October initial claims compared to benchmark rate that assume an unchanged unemployment rate given different population growth assumptions (see Sep CPI & Jobless Claims Trends) have not exerted upward pressure on the unemployment rate despite an initial hurricane impact earlier in October. Furthermore, beyond initial claims continued claims as a percentage of insured employment essentially remained at similar levels seen in 2023 (second chart below). The October jobs report could very well turn out stronger than expected, like the September report.

• The pick up in upward momentum of trimmed mean-based inflation measures since August could very well reflect a fading disinflationary impulse. This is not out of the ordinary of indeed current real activity is driven by an expansionary labor supply shock. And as such a shock works itself through the economy the initial disinflationary impulse will make way for a (temporary) pickup in inflation as prices move back to where they were before the positive labor supply shock.
• The outcome of the November 5th elections will not impact the Fed's policy rate policy during the remainder of this year and not even in January. After January the economic policies of the new administration will become more clear and might already result in concrete policy actions in Q1 2025.

Given that real activity is still expanding at a strong pace, the above described uncertainty will make the Fed more cautious with its rate cuts going into 2025. I expect to see two more 25bps rate cuts this year, but the cutting pace beyond December will truly depend on data and Washington DC politics.

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