Macro Market Notes Digest - September 2024

Welcome to the September 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 September I wrote about the August jobs report, the September FOMC meeting decision, and the state of consumption, excess savings and core PCE inflation in August. 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 professional opportunities that could be of interest to me.

The Monthly Digest

August Payrolls: Bouncing Back (Sep. 6th)

A summary of this post was featured on LinkedIn News: US added 142,000 jobs in August

Key takeaways:

• Payrolls growth picked up in August, but trends are slowing and are heading towards the breakeven pace needed to keep the unemployment rate constant at current levels.
• The unemployment rate eased to 4.2% as the labor force participation rate remained unchanged at 62.7%.
• The job-finding rate improved significantly over the month at 52% with smoothed trends also improving but still remaining below 50%. The unemployment rate consistent with recent job-separation and job-finding rates is now at a level where demand and supply of workers is more balanced. This suggests a near-term outlook for the official unemployment rate where this rate remains elevated.
• Wage growth momentum in composition-adjusted average hourly earnings have picked up and remain elevated at a pace inconsistent with 2% inflation.
• With the Fed’s recent switch to more emphasis on the employment side of its mandate relative to that for inflation, today’s data seems more in line with a gradual easing of the future policy rate path.

Sep FOMC Meeting: How Far Down? (Sep. 18th)

Part of this post was featured on LinkedIn News: Fed seen lowering interest rates

Key takeaways:

• The FOMC decided to lower the Fed funds target range from 5.25%-5.50% to 4.75%-5%, with Governor Bowman dissenting and favoring a 25bps cut instead. The updated Summary of Economic Projections (SEP) signaled a bias to continue to lower rates to 3.25%-3.50% by the end of 2025.
• Near-term underlying PCE inflation trends likely moved further below 2.5% in August, consumption spending remained strong, and labor market activity in August recovering relative to July and suggest cooling towards stability of the unemployment rate in the low 4% range. This suggests slowing economic growth rather than a recession remains the correct base case.
• A variety of policy rate rules suggest that, as of August, the Fed funds target was about 100bps too high. With today’s rate cut, the Fed made up a decent chunk of this deviation. With the updated SEP 2024 Fed funds projection now at 4.4% this suggests that in the near-term the Fed is focused on catching up towards a more appropriate rate level.
• Under the base case of a gradually slowing economy and inflation moderation for Q4 and beyond, the new SEP Fed funds rate projection suggests that after today we’ll likely see consecutive 25bps rate cuts between now and March for a total of about 100bps worth of further easing.
• Beyond the March 2025 FOMC meeting, uncertainty regarding the neutral Fed funds rate level, both in terms of the data as well as disagreements within the FOMC, will mean a more cautious rate cutting path for the remainder of 2025.

Aug Personal Income & Outlays: Household Strength Continues (Sep. 27th)

A summary of this post was featured on LinkedIn News: Cooler prices pave way for rate cuts

Key takeaways:

• Personal income growth out of wages and salaries was revised up substantially for most of 2024. Household wage income growth now notably overshoots 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 July and August, it fell around $12 billion and equaled about $407 billion in August.
• As in the previous month, in August 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 given strong household wage income growth and still sizeable excess savings, this likely does not signal that a large downshift in consumption is forthcoming over the next six months.
• Core services excl. housing PCE inflation, the Fed’s favorite gauge of underlying inflation, continues to head in the right direction, for now. The central tendency measures of PCE inflation are similarly slowing over the near term and are closing in on 2%. Over an annual horizon, underlying inflation still remains above target.
• The slowing in underlying inflation measures will no doubt give most Fed officials comfort that cutting policy rates was the right move. Given strong wage income and consumption growth rates the Fed will likely, for now, pursue a gradual rate cutting path.

Final Thoughts

Finally the Fed started its rate easing cycle in September after inflation readings over the summer lowered barriers for policy easing and downbeat labor market numbers made Fed officials uneasy with regards to the health of the economy. While the direction of Fed funds rate moves seems to be set for the near-term, there's clearly uncertainty about the pace of this easing:

• The final Thursday and Friday of September made, again, clear that real activity growth in the U.S. has been running at a strong pace this year. Especially consumption spending remains above average and with the recent upward revisions to household wage income growth there is enough ammunition in the pipeline to keep this going for a while.

• The upward revision of household wage income in the August PCE report in itself was not really surprising. Labor market data over the past couple of months did suggest that the pace of hourly wage growth remained out-of-whack compared to pace estimates that were in line with either the 2% inflation target or current survey-based near-term (PCE) inflation expectations of around 2.5% (chart above).

• At least for now the labor market appears to have recovered from the deterioration in June and July and stabilized at solid levels. The two charts above show that throughout August and September the relative size of initial claims have eased notably, signaling a low threat of a pick up in layoffs, while the relative magnitude of continued unemployment benefit claims remain in line with what we've seen in 2023. Further labor market data will be crucial to watch whether this trend sticks or whether the labor market cooling morphs into a deterioration and thus a recession.

• There's a growing consensus that the real neutral rate has risen, both amongst Fed officials as well as based on models and markets data (chart above). Without a recession this means that the end point of the easing cycle is likely higher than previously thought and thus will also be reached earlier in 2025. There does appear a fair amount of uncertainty amongst FOMC members by how much the implied neutral Fed funds rate has risen because of this and this will a potential point of conflict within the FOMC in 2025.

Given that real activity is still expanding at a solid pace and assuming a labor market that is cooling and not shrinking, the Fed will be more cautious with its rate cuts for the remainder of this year and into 2025. I expect to see two more 25bps rate cuts this year, followed by 25bps rates at the January and March FOMC meetings in 2025. After that I believe the Fed will take a break and assess the data. Further cuts later in 2025 are still possible, but under a base case of no recession there will only be a few of them as the Fed "feels its way" through towards a consensus level of the neutral policy rate. There are two risks to this modal path:

• Recession. In this case Fed easing becomes more aggressive with its rate easing. Markets certainly have priced in this tail risk.
• The disinflationary impulse fades later 2024 and we see some re-firming of inflation in the spring of 2025. 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. Confronted with this increased inflation volatility the Fed might decide to pause the rate cutting cycle and stay on hold for the rest of 2025. Markets clearly have not priced in this particular risk.

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