The Fed needs to seriously reconsider what’s still, but probably shouldn’t be, a guaranteed November rate cut.
Friday’s jobs report showed the US economy added 254,000 jobs last month and, just as importantly, headlines from August and July were revised higher. Markets were accustomed to downward revisions.
The range of estimates for September’s headline was 70,000 to 220,000. So, the actual figure easily topped the highest estimate and was more than 100,000 ahead of the consensus.
With the revisions — which added 72,000 across the prior two months, including 55,000 to July, a remarkable development — the three-month moving average is 186,000. Headed into the release, it was 116,000. Read that again: The three-month moving average, which the Fed is implicitly relying on to justify rate cuts, just rose 70,000 in one fell swoop.
Private payrolls jumped 223,000. Consensus there was 125,000. Restaurants and bars hired 69,000 people. That was five times the 12-month average. The ADP release covering September told a similar story. Hiring was strong last month. And jobless claims, you’re reminded, remain very low.
Guess what? Average hourly earnings rose 0.4% in Friday’s release, above every estimate. The 12-month rate was 4%, also above every estimate. This was the second month in a row that AHE overshot, underscoring the message from services PMIs which suggested labor-related price pressures are percolating again.
Note that August’s MoM AHE print was revised up: It now shows a 0.456% gain. That’s pretty close to 0.5%, ain’t it? You don’t want that if you’re the Fed.
The jobless rate ticked down for a second month to 4.1%. Economists expected an unchanged UNR at 4.2%. The household survey showed a 430,000 gain.
I’m not sure you need a lot of analysis here, although that won’t stop macro watchers from penning breathless editorials: This was an unambiguously strong jobs report and, coming very quickly full circle, it plainly suggests the Fed should consider whether it makes sense to cut again so quickly in November.
The Committee will see another NFP release before the November FOMC. But they’ll be in the pre-meeting quiet period, and that report could be noisy. Between now and then, they’ll get a CPI release, a retail sales print and the advance read on Q3 GDP. The latter’s going to be strong. Quite strong, probably. 3% strong. I don’t know about retail sales — that’ll be the usual toss up — and CPI will probably be at least a semblance of tame. But if the justification for rate cuts is labor market deterioration, September payrolls torpedoed that rationale.
At the very least, the chances of a 50bps cut next month are materially diminished. Remember: The Fed can still get to the median 2024 dot with a 50bps cut in December. Bottom line: There’s no reason — none — to cut in November if you don’t have the data to justify it.
“I told you so,” Michelle Bowman said, somewhere. “I told you so.”
Yep.
The economy is bucking like the bronco it is.
If I recall correctly the FED found themselves in a similar pickle just before Voelker was appointed. They cut rates at that time and the bronco delivered. Or so my recall tells me.
As a flee on the bronco I am ready for the ride and planning to take flight after the pendulum swings the other way.
Helene will make the October NFP a mess to decipher. No cut in November has to be in play.
Broken record that I am … and H’s humor on economic predictions – how can these models be so wrong?
Either the process is highly unstable or the models are wrong – or both
Who can make long term investment decisions with that data?
I’m a broken record too: There’s nothing to “model.” None of this stuff — macro stuff — exists independently of us. We’re staring in the mirror and pretending we’re not looking at ourselves.
Someone with a bbg terminal: have economic surprise indices inflected?
Citi US econ surprise turned +ve recently
I think most of the FOMC were and are likely to favor 25bp in November. The dovish trajectory has been so explicitly communicated by so many members that, even allowing for uncertainty and data dependency, a wholesale flip-flop of the dots based on one data point seems unlikely.
How would a pause in November constitute a “wholesale flip-flop of the dots”? There’s no meeting-by-meeting dots. They can pause in November, then cut 50 in December and that’d be the median September dot. It’s 100bps for 2024 inclusive of September’s 50bps cut. They just “need” 50 over Nov/Dec.
You’re right, not of the dots. Of the messaging from Powell et al, which was for an assured 25-to-50 in November (is what market heard, and Powell didn’t try to deny). I’m thinking that delivering zero would be a flop.
They flop all the time using WSJ
Also, and I should have collected my thoughts sufficiently to include this in the previous comment, since rates have already discounted 25-50 bp more this year and some more next year, delivering zero in November risks forcing the market to discount zero more this year and none next year. After all, if a good NFP means no cut now, then more good NFPs could mean no cuts ever – so the slightly histrionic market assessment could go. So the curve goes up and steepens, term premia rises as well, and the Fed has tightened by not cutting. If lower rates are the key to reducing housing inflation – as many think – and if housing is the biggest problem part of inflation – as many more think – then sending mortgage rates back to 7% wouldn’t be desirable.
UE unrounded is 4.05%
Note that Yardeni now says pause. And Lyngen talking about it too.
I still would like to see the impact of the interest rate drop on savings’ cash flows and thus (at the margin) on the consumption of people with savings/enterprises with cash on their BS.