More Work to be Done

November 29, 2022

The ongoing debate over a potential Fed pivot continues with the latest commentary coming from New York Fed President John Williams. Yesterday, speaking to the Economic Club of New York, Williams suggested a shift to a less aggressive policy pathway is likely still a ways off given the still elevated level of inflation which could persist into 2024 and a rising risk of recession in 2023.?

“There is still more work to do,"?Williams said. While he acknowledged there were some signs of improvement, he went on to say that bringing down underlying price pressures, including those that reflect rising domestic wages, will require further tightening of monetary policy.?

Williams’s comments follow earlier commentary from Federal Reserve Chair Jerome Powell who warned during the November press conference that rates would ultimately move higher than previously expected.?

Recall, according to the latest Summary of Economic Projections (SEP), the majority of Fed officials anticipated a 4.4% federal funds rate at year-end and a terminal rate of 4.6% sometime next year.?

The Committee has already revised higher its forecast by almost 200bps since March, but given the stubbornly elevated level of inflation, the Fed will expectedly revise higher its forecast for rates a fourth time in the December SEP.?

Overseas, protests in China, meanwhile, continue, fueling optimism Beijing may cave in terms of its?“draconian”?Covid-19 safety measures. Some analysis argues officials have already moved in that direction, softening a number of restrictions and quarantine requirements. Others, however, suggest Beijing may see such?“unruly behavior”?as a precursor to flex its muscles by maintaining?policy controls and reiterating the need to protect the country as a whole.?

Of course, it is yet to be determined how the protests will play out and whether or not the demonstrations will have a meaningful impact on adjusting the country’s Covid protocols. Some are hopeful the government may respond with a meaningful reduction or lessening of safety restrictions, which could positively impact domestic activity and global supply limitations.?

From an economic standpoint, China’s Zero-Covid policy has already had serious implications for growth. China's GDP rose?“only”?3.9% in Q3, well below the official target of 5.5% and following a 2.7% decline in Q2.?

Yesterday, on the economic calendar, the Dallas Fed manufacturing Index unexpectedly rose from -19.4 to -14.4 in November, a three-month high, albeit the seventh consecutive month of decline. According to?Bloomberg, the index was expected to decline further to -21.0.

This morning, the S&P Case-Shiller 20 City Home Price Index dropped 1.24% in September, slightly more than the 1.20% decline expected and the third consecutive month of decline. Over the past 12 months, the 20-city index rose 10.43%, the smallest gain since December 2020 and down from the 13.06% increase the month prior. On a national level, home prices fell 0.76% in September and rose 10.65% over the past 12 months, also the smallest gain since December 2020 and down from the 12.88% rise in August.

Also this morning, the FHFA House Price Index unexpectedly rose 0.1% in September following a 0.7% decline in August. According to?Bloomberg, the index was expected to decline 1.2%.

Finally this morning, the Conference Board’s Consumer Confidence Index declined two points to 100.2 in November, in line with the expected decline to 100.0 and the lowest reading since July. In the details of the report, a gauge of current conditions declined from 138.7 to 137.4, and a gauge of future expectations dropped from 77.9 to 75.4 in November.

Tomorrow, we will have a look at the Chicago PMI ahead of Thursday’s November release of the national ISM Index. Regional indices – while all slightly varying in region and scope – have painted a clear downward trajectory in terms of production and output around the country, reinforcing a similar downward trajectory in the national data. After a discernable upward spike in the aftermath of Covid, domestic production has slowed markedly, dropping from a peak of 63.7 in March 2021 to 50.2 last month, barely above breakeven, or a reading over 50. Come November, some on the Street expect the headline to finally pierce through into contractionary territory after bouncing along breakeven for the past two months.

Also mid-week, the latest read on the number of job openings will be released, as well as November ADP employment data. Both ahead of the key employment report which will be released on Friday. With the Fed focused on the inflation component of the Committee’s dual mandate, each employment report is increasingly vital, as any indication of less than solid conditions could shift the Fed’s focus back to establishing?“full employment.”

Last month, nonfarm payrolls rose 261k. While still positive employment growth, this was the weakest pace of hiring since December 2020. Suggesting again – just as we’ve noted in housing market activity – that second-derivative decline, or a slower pace of still positive activity. The unemployment rate, meanwhile, ticked up last month from 3.5% to 3.7%. The rise in fact was particularly disappointing as it reflected a decline in household employment rather than an increase in labor force participation.?This month, the unemployment rate is expected to remain at 3.7%. Finally, average hourly earnings are expected to rise 0.3% in November and 4.6% year-over-year after slowing somewhat from 5.0% to 4.7% in September. While down from a recent peak of 5.6% in March of this year as long as labor demand continues to outpace available supply, wages are likely to remain elevated, although not necessarily move higher from here.

Ahead of the key employment report on Friday, on Thursday, the latest read on consumer spending and income will be released.?

The latest retail sales report surprised to the upside with retail expenditures jumping 1.3%, the strongest monthly gain since February, buoying optimism that the consumer remains increasingly resilient as we head further into the key holiday season.

Overall consumption – goods and services – has risen 0.6% for two consecutive months and has slowed from a near-term peak of 1.2% in June and is excepted to rise 0.8% in the latest October report. Income is expected to rise 0.4% in October following a similar rise in September. Over the past 12 months, meanwhile, the PCE while off peak levels remains still well above the Fed’s 2% target, resulting in a rising burden for consumers and businesses. Remember, even as the pace of inflation or price growth slows, nominal prices are still rising. As of September, the PCE remained at 6.2% for the second consecutive month, down from 6.4% in July with the core PCE rising from 4.9% to 5.1%. In October, the PCE is expected to rise 0.4% and 6.0% year-over-year. Excluding food and energy, the core PCE is expected to rise 0.3% in October and 5.0% over the past 12 months.

?-Lindsey Piegza, Ph.D., Chief Economist?