Encouragingly, this morning’s #JobsReport witnessed not only solid job gains, with 1.37 million #jobs added, but also a drop in the #unemployment rate to single digits, at 8.4%, which is a psychologically meaningful threshold to breach.
Still, great perspective is required when situating this #data in proper context. The #unemployment rate is still resting too close to double digits, and many #businesses will not recover their footing for years to come, if ever.
Additionally, the sectors of the #economy that were responsible for much of the past decade’s #job gains (travel, #leisure and entertainment) will be slower to come back and may be years away from recovering.
All that implies that the @federalreserve’s policy stance will continue to be reflective of its deep commitment to recovering the hard-won gains in #jobs and #growth, which the #pandemic has stripped away.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
Yesterday’s @federalreserve move signals something of an ending to a story that has played out for several months now, in terms of the Fed’s rate cutting cycle, associated with what were significantly restrictive interest rates.
The #FOMC cut policy interest rates by a quarter-point, to the 4.25% to 4.50% range, and communicated more #hawkishly through the updated dot plot/Summary of Economic Projections (SEP), as well as during the Chair’s press conference. To us, this suggests that we’ve entered a new phase of the rate cutting cycle.
We have often argued that the more elevated Funds rate creates great pressure on lower income cohorts through the housing, credit card, and auto finance channels than is worthwhile at this stage, particularly given where inflation has decelerated to.
As usual, today’s #CPI report created great anticipation and then introspection upon its release. It’s always amazing that a few basis points (bps), one way or the other, can have such a large impact on market perception, and presumably on the interpretation of how the @federalreserve will react to such a number.
The truth, however, is that the #Fed considers a multitude of #inflation readings, with a higher emphasis on the Core PCE measure. Yet, we find ourselves at a point in time where the range of outcomes for inflation related to recently solid economic growth, to newly elected political officials, and to the consequential potential for higher tariffs and higher levels of growth, etc., has led to an enormous focus on this number.
To that end, today’s report showed still firm inflation readings of 0.28% month-over-month, and 3.33% year-over-year for Core CPI (which excludes the volatile food and energy components) and 0.24% and 2.60% for headline CPI, over the same time periods.
Upon reflection, last week’s #JobsReport was, as always, interesting and helpful for understanding where employment currently stands, which is at the top of the priority list for the @federalreserve.
However, the data is also challenging to interpret, in terms of true job growth, given distortions from recent hurricanes in the southeast of the U.S., labor strikes in the Pacific Northwest, and the uncertain impact of these events.
Moreover, this payroll report occurred right in the middle of some major economic and market-moving events, such as the U.S. elections, the announcement of the U.K. budget, major tech and other corporate earnings, the onslaught of other economic data, and this week’s #FOMC meeting.
Call it the Couldn’t Possibly Ignore report. That’s how important CPI has been in the past few years, as it has kept markets on edge as to what it means for Federal Reserve policy and interest rates across the curve.
It’s still important, but the Fed’s clear focus has shifted toward more balanced priorities, with considerably more emphasis on the labor market for judging how quickly (if at all) to move the Fed funds rate.
In today’s data, Core CPI (excluding volatile food and energy components) printed at 0.31% month-over-month and 3.31% year-over-year.
CIO Charts of the Week: The Economy Is Doing Better Than We Originally Anticipated
While many called for recession in 2024 due to recent weakness in the labor market, the triggering of the Sahm rule, and generally weaker growth prospects, last week’s GDP revisions from the @bea_news helped to quell many of those concerns for the time being. Real GDP was revised up from 22.9tn to 23.2 tn, thus highlighting that the economy is doing better than previously expected, boasting a 3.0% growth rate quarter over quarter for Q2 and a 3.2% growth rate for 2023.
Almost more impressively, GDI, a measure often cited as the better representation of growth through the tracking of income rather than expenditures, had previously been running over $500bn below GDP! This growing discrepancy blurred the picture of the state of the economy and called into question the relative strength of households as they seemed to be spending more via GDP, but not making more via GDI. However, in last week’s revisions, GDI was revised up to match GDP!
This paradigm was largely due to impressive upward revision in personal and disposable income spanning back to 2021. So, while the data previously created the narrative that households were stretched and potentially spending beyond their means, these revisions demonstrate that in aggregate, households are in a decent place.
The markets have been riveted with a singular focus on one number, as a reflection of the Federal Reserve policy stance, and the primary question has been whether the Fed would cut 25, or 50, basis points (bps) at today’s meeting.
As if one number carried as much relevance to financial assets as Pi does to mathematics and physics, in determining a circle’s diameter to its circumference.
A 50-bps cut, bringing the Fed Funds rate to 4.75% to 5.00% is not Pi, a special number that reveals many secrets. The future rate path remains uncertain and data dependent, and all that has happened is the Fed has jumped out to a faster start on the path to neural, an appropriate move given how far they are from their likely destination.