In stark contrast to last week’s dearth of economic news, this week was full of prominent releases that could have a meaningful impact on future Fed policy decisions. Some of the significant reports included the JOLTs Job Openings, Non-Farm Payrolls, Unemployment Rate, ADP Employment Change, Conference Board’s Consumer Confidence, GDP Price Index, and the Core PCE Price Index. But with all these reports, did any data give the Fed what they have been looking for? Let’s take a look.
This week, there were two primary buckets of news: Jobs and Price data. Both are very important to what the Fed does next, but the Jobs data was more consistent, so we’ll begin there. Tuesday brought the first big news, as the JOLTs Job Openings report dropped considerably. In what was likely the clearest signal of the week, it appears the labor market is beginning to loosen up, as job openings fell to 8.8 million, more than 600K below consensus estimates and down from over 11 million in late 2022.
In addition to JOLTs, the ADP Employment Change and the BLS Non-Farm payrolls report were largely aligned with the anticipated changes. Lastly, on the employment front, the unemployment rate ticked up 30 basis points, from 3.5% to 3.8%. While this is still historically low, it is a significant upward move for just one month. When taken in aggregate, this should tell the Fed that the implemented rate increases are having a direct impact. And since so much focus has been on the tight labor market, it would be hard to imagine these numbers as anything other than a dovish indicator for future policy moves.
With that said, we can’t look at the labor picture in a silo, and when coupled with price data, of course, it becomes a little less clear. While the headline price data was encouraging, with the GDP Price Index and the Core PCE Price Index coming in at or below expectations, one piece of data under the covers was more troubling. Starting with the GDP Price Index, the read was all good. Prices were only up 2% during Q2, lower than the preliminary estimate of 2.2% and well below Q1 of 4.1%. In addition, headline Core PCE prices continued to show signs of progress, with prices up 0.2% MoM and 3.3% YoY, precisely in line with estimates. And while that would usually be good enough to keep the proverbial foot off the rate increase accelerator, there was one subcomponent that might give the Fed pause.
That subcomponent is services inflation, excluding housing, and it is the metric the FOMC has repeatedly pointed to as the guide to cyclical inflation pressure. Unfortunately, it has been a rough couple of months as the annualized increase has risen from 2.4% in May to 5.6% in July. And while the 3-month and 6-month trends are lower, if the Fed does increase rates again this Fall, this would be the metric that allows them to do it.
In aggregate, the data suggests the policy measures (i.e., interest rate hikes) taken to reduce inflation are working. The question is, does the newest data give the Fed what they are looking for? We’ll find out soon enough.
Economy
- U.S. equity markets bounced back this week, with the S&P 500 up 2.5%, the Nasdaq up 3.2%, and the small-cap Russell 2000 up 3.6%. There was economic news everywhere you looked, and markets reacted well most of the week.
- The Conference Board Consumer Confidence Index® declined in August to 106.1 (1985=100) from a downwardly revised 114.0 in July.
- Private businesses in the U.S. hired 177K workers in August, the least in five months, missing market expectations of a 195K increase.
- The U.S. economy added 187K jobs in August, compared to the downwardly revised 157K in July and more than market expectations of 170K. Still, it was the third consecutive month with job gains falling below the 200K threshold, indicating a gradual easing of labor market conditions.
- The labor force participation rate in the United States rose to 62.8% in August, the highest since February 2020, at the beginning of the pandemic.
- Average hourly earnings for all employees on U.S. private non-farm payrolls rose by 0.2% to $33.82 in August, below market estimates of a 0.3% increase. It was the smallest rise in average hourly earnings since February 2022.
Stocks
- U.S. equities were in positive territory. Technology and Materials were the top performers, while Utilities and Consumer Staples lagged. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased seven basis points to 4.17% during the week.
- Global bond markets were in positive territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
