A Strike and Slew of Data Ahead of Friday’s Key Employment Report
Following last Friday’s somewhat mixed inflation report showing further reprieve on the headline juxtaposed with a rise in the core, the upcoming employment report at the end of the week will prove even more pivotal in determining the Fed’s next policy move come November.?
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Recall, on Friday, the PCE rose 0.1% in August, as expected and following a 0.2% gain in July. Year-over-year, headline inflation increased 2.2%, a tenth of a percentage point below expectations and down from the 2.5% annual increase in July.
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Excluding food and energy, the core PCE rose 0.1% in August, lower than the 0.2% gain expected and following a 0.2% increase in July. Over the past 12 months, however, core inflation increased 2.7%, rising from the 2.6% annual gain in July and marking a three-month high.
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The supercore PCE measure – core services excluding shelter – rose 0.2% in August and increased 3.3% on an annual basis, also an uptick from the previous July pace of 3.2% and a two-month high.
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Bottom Line: A somewhat mixed inflation report is likely to intensify the already present divide among policy officials.?While the headline offered further confidence in the disinflationary trend and support for the Fed's larger 50bp earlier this month, a tick higher on the core after one month of sideways movement coupled with a lack of further improvement in the core CPI and core PPI last month suggests there remain upside inflationary risks.?
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Taken alone, the headline improvement in the PCE is enough to justify a further 25bp cut in November now less than six weeks away. Although, another month of questionable inflation data and/or a stronger-than-expected employment report this Friday could embolden the more hawkish members.?
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As Chair Powell noted during the press conference in September, the Fed is in no rush to cut rates, and furthermore, 50bp moves should not be seen as the new normal pace. As always the Fed, he reiterated, will remain data dependent and is not on a pre-determined pathway.??
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Also on Friday, personal income and consumption were slightly weaker in August, not unexpected however given the latest GDP release showing still a solid pace of expenditures.??
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Personal income rose 0.2% in August, half of the 0.4% rise expected and following a 0.3% increase in July. Consumer spending, meanwhile, increased 0.2% in August, a tenth of a percentage point less than expected and down from the 0.5% rise the month prior. Year-over-year, consumer spending increased 5.2%, a four-month low, while personal income rose 5.6% in August, an eight-month low.
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Adjusting for inflation, real consumer spending rose 0.1%, as expected, and real income also gained 0.1%?in August for the third consecutive month. Over the past 12 months, real spending rose 2.9%, up from the 2.8% annual gain in July, and real disposable personal income gained 3.3% in August for the fourth consecutive month.
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The September nonfarm payrolls report released this Friday is the key report of the week. After a smaller-than-expected gain of 142k in August, nonfarm payrolls are expected to rise 146k in September, potentially marking a four-month high. The gain would potentially boost the three-month average, from 116k to 126k.
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The unemployment rate, meanwhile, is expected to remain steady 4.2% for the second consecutive month, still well below what the Fed designates as the full unemployment range, and perpetuating the notion of ongoing tight-ish labor market conditions.
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Average hourly earnings are expected to rise 0.3% in September, following a 0.4% gain in August, potentially resulting in a 3.8% increase over the past 12 months, potentially matching the 3.8% annual increase in August. ?
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Bottom Line: With a growing focus on potential weakness in the labor market, a weaker-than-expected read in Friday’s report will no doubt boost expectations for a more sizable Fed response come November. Equally, however, further indications of an ongoing solid or steady labor market coupled with still elevated prices will serve to underscore the need for a more tempered and patient approach to rate cuts going forward.?
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Ahead of the Friday employment release, tonight at midnight, thousands of dockworkers in the U.S. are poised to strike at nearly three dozen locations across 14 port authorities on the East and Gulf Coast. According to reports, nearly two-thirds of U.S. trade is set to be impacted if the strike occurs, potentially affecting the delivery of everything from fruits to alcohol, to auto parts and Christmas trees.?Again, according to reports, the dispute is primarily over future pay, with the Maritime Alliance, which represents terminal operators and ocean carriers, offering a 40% raise over the 6-year contract, while the International Longshore and Warehouse Union, which represents port workers all across the country, is looking for around double that for its workers.
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On the economic calendar, there is also a slew of data poised for release ahead of Friday’s report.?
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This morning, the Chicago PMI rose from 46.1 to 46.6 in September, a three-month high. According to the median forecast, the index was expected to increase to 46.0 in September. In the details of the report, prices paid and supplier deliveries rose, signaling expansion, while production, inventories, new orders, employment, and order backlogs fell, signaling contraction.
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Also this morning, the Dallas Fed Manufacturing Activity Index unexpectedly ticked higher from -9.7 to -9.0 in September. According to the median forecast, the index was expected to decline to a reading of -10.8. September’s reading of -9.0, however, marks the 29th consecutive month of a negative print.
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In the details of the report, employment rose from a reading of -0.7 to +2.9 in September, a two-month high. On the other hand, new orders fell one point to a reading of -5.2, and also averaging a reading of -5.2 over the past six months, production dropped from +1.6 to -3.2, and capacity utilization slumped from -2.3 to -7.0 in September, the fifth consecutive month of a negative reading. Also, the six-month general business outlook index slipped from +11.6 to +11.4 in September, the lowest reading in four months.
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Tomorrow, the final S&P Global U.S. Manufacturing PMI will be released, along with construction spending, the August JOLTS report – or Job Openings and Labor Turnover Survey, and the ISM Manufacturing Index for September.
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In August, manufacturing activity rose 0.4 points to a reading of 47.2 in August. Despite the monthly uptick, however, this marks the fifth consecutive month in contractionary territory, or a reading below 50. In September, the ISM Manufacturing Index is expected to rise, albeit still remain in contractionary territory at a potential reading of 47.6.
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Later in the week, on Wednesday, weekly mortgage applications, followed by the September ADP employment report.
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On Thursday, weekly jobless claims, the final September print of the S&P Global U.S. Services and Composite PMIs, along with factory orders for August, durable goods orders, and the August ISM Services Index.
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Like the ISM Manufacturing Index, the ISM Services Index unexpectedly ticked up in August, albeit minimally by one tenth of a point to a reading of 51.5, the highest reading since May. This month, the services index is expected to remain unchanged at 51.6 in September for a second consecutive month.
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Finally, on the Fed-speak front, we will again hear from a number of Fed officials, including Chair Powell later today at 1:00 p.m. ET at a National Association for Business Economics (NABE}) conference in Nashville.
Tomorrow,?Bostic and Cook take the stage, along with Cleveland’s Beth Hammack (who took the place of Loretta Mester last month). Also this week, on Wednesday, St. Louis Fed President Alberto Musalem will give welcoming remarks at the St. Louis Fed Community Banking Research Conference and Governor Bowman will give the keynote address at the same Community Banking Conference. On Thursday, we’ll hear from Minneapolis Fed President Neel Kashkari, and finally, on Friday, New York Fed President John Williams will speak at an event at the New York Fed called “The Future of New York City: Focus on Jobs.”?
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Already the array of Fed chatter throughout last week and mixed messaging is further muddying the waters, underscoring the uncertainty in the Fed’s pathway forward and the lack of consensus among officials amid ongoing uncertainty as the data continue to evolve.?
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-Lindsey Piegza, Ph.D., Chief Economist
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