Key Inflation Data This Week

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby.

Quincy Krosby:

Good morning everyone. This is Quincy Krosby. It is the Talking Point. It's Tuesday morning, September 3, and it looks as if we will open to a weaker market. But remember we ended last week, the market was actually strong, and what's interesting is that the market was able to absorb the disappointing, I'm putting that in quotation marks, disappointing Nvidia report and guidance. And it was fascinating to watch because I followed it all through the evening after the Nvidia had the call with the analysts and the price kept coming down in the aftermarket, it came down the next trading day. And yet, the market was able to recover. The broader market was able to just say, okay. There are other things that we're looking at, right? Financials, just to give you an example. But also what was interesting was that the other tech names, even though they didn't, you know, jump. The Triple Qs, didn't jump to levels that would have grabbed the headlines.

Quincy Krosby:

What we did see, however, what the so-called hyperscalers, and those are the companies in the Magnificent Seven that have spent last quarter $60 billion on AI infrastructure. They actually recovered. So that's important for us to realize that Nvidia, the disappointment that it didn't wow the way it should have wowed, but still very good numbers. It didn't bring down the entire market. And that, I think that's extremely important for us to just realize and, and that is healthy, a healthy response from the market. Now, this week is going to be obviously extremely important because we have a September 18 Federal Reserve meeting. It'll be September 17 and September 18. And the question will be, is it going to be 25 basis points or will it be 50 basis points? And what would happen to the market and what would be the catalyst? So that's why this week is important because this week we are going to have the payroll numbers and we know that at the Jackson Hole, Wyoming meeting or confab, as they like to say, when Chairman Powell spoke, he talked about the labor market.

Quincy Krosby:

And remember he's been mentioning the labor market over and over again. That's the Fed's maximum employment mandate. And he said, look. We don't want it to cool anymore and we're watching it. So why, again, this week is going to be so important before the next Fed meeting. I want to also mention that at the minutes from the last Fed meeting where they decided not to, you know, not to cut rates, the July 31 meeting, it is July 30 and 31. But the point here is, according to the minutes, several quote unquote several members made the comment, maybe we should think about cutting rates at this meeting. Now remember, it wasn't just about the weaker employment numbers that they were looking at. The Fed, these are PhD economists. They're not running a hedge fund. They were looking at the broader, the broader labor market and they thought maybe, maybe it is a good idea for us to cut at this meeting.

Quincy Krosby:

And the vote was no. But the point here is that this week we'll have quite a bit of labor market related data. First of all, today, that's today, that's Tuesday, September 3, we're going to have the ISM, Institute for Supply Management, these are the purchasing managers in manufacturing, give us a report and in that report we're going to hear what are the hiring expectations? Are they up? Are they down? And they had been, I have to say, they've been sort of down, down, down. In fact manufacturing, based on the ISM manufacturing reports, which is one of the most widely followed reports globally about the U.S. economy, it's been in contraction territory. The expectations are, by the way, that it will still, when it comes out this morning at 10:00 AM Eastern, that it will remain under 50. Remember, that is the line that above 50 is expansion, below 50 is contraction and that it will remain in contraction territory.

Quincy Krosby:

But the expectation is it'll be a tad higher than the last one, but still below 50. But the market is going to be focused on tell us about those hiring expectations in addition to new orders. That's going to be obviously very important. And also because we're not going to forget about inflation. That's just not an issue that's just going to disappear. We're still following it. So what we're going to pay attention to is prices received and prices paid, to give us an idea of is inflation still embedded in the system? And then we also have to realize too, that even if the prices that the manufacturers are paying actually have edged up, that's a big if, can they pass it along? And that's also an issue for the service sector as well. And that's why I'm mentioning it because we are going to have the ISM services, the broader part of the economy come out on Thursday and it's going to be very much followed the same way we're going to follow the manufacturing.

Quincy Krosby:

And right now the expectations are that it will remain in expansion mode, but just edge a tad lower than the last report, which was 51.4%, but that it will be, again, it will be 51%. That's the forecast. And again, there we're going to do expectations, hiring expectations, also prices paid, new orders. These are all going to be very important before the Fed pays attention to the ADP report that comes out. Now I know that folks say, well, it doesn't really have a direct positive correlation with the Friday number. That includes the government reports, but nonetheless, it does focus on the private sector. It gives us a breakdown of which sectors are hiring. And the fact of the matter is, it is important and we look at the trajectory of it normally, while it's not a hundred percent where the Friday number, the payroll number, follows it, the trajectory tends to be in the same direction.

Quincy Krosby:

So we'll see whether or not there'll be a pickup in the employment numbers coming out of the ADP report. And remember we saw that ADP report, the last read was 122,000 jobs. The market really gasped because it was lower than expectations. So we're going to see where that's going to come out. So there's an awful lot for the market to digest. Now here's the thing. On Friday morning, the expectations are that we are going to see 162,000 new jobs created. That's compared with 114,000 from the last report. But there's also an estimate, this comes from consensus estimates of all the analysts who send in their numbers that the unemployment rate will tick down from 4.3% to 4.2%, extremely important for the Fed, important for the country. Now the question is, if that number is not correct and we see it move up to 4.4%, that is going to take away the market's collective breath because then the Fed is going to have to try to figure out, look, is this a pattern?

Quincy Krosby:

Because what we know is the historical pattern is that when the unemployment rate inches higher, it tends to then move higher again and at a faster pace. So this is going to be watched very, very closely. But as I just said, the expectations are, the forecast is that it actually edges down a bit to 4.2%. Now also, I want to point out that the Federal Reserve, and most economists suggest that when the unemployment rate climb higher to 4.3%, it had to do with more folks coming into the labor market looking for jobs. And then if those jobs aren't available, it actually helps push up the unemployment rate. The vacancy rate is going to be important because what we know from the continuing unemployment claims, it's becoming harder for folks to get new jobs. And that also is important because if that continues, Again, these are the historical patterns,

Quincy Krosby:

it then starts to be reflected in perhaps cutting from the companies. Now, let's go back to tomorrow, Wednesday, and we're going to get the job openings expectations there is that it'll show 8.1 million new jobs. But I want to point out that the job openings report, we call it the Jolts report, Job Opening and Labor Turnover. We look to see how many people have quit their jobs to go to other jobs. Normally when that happens is that folks are leaving their jobs because they're going to get paid more at another job. That's the typical reason that we see that climbing higher, the labor turnover. But we haven't been seeing that because folks are concerned about jumping to a new job and they're concerned about where they are. We've seen that in many of the surveys, that even though the surveys on consumer sentiment have actually inched a tad higher, we know that they are still worried about the labor market and their security of their own jobs.

Quincy Krosby:

Now the other thing about that Jolt report, Job Opening and Labor Turnover, cause you'll hear so much about it, there's a concern that the way that they come up with their numbers isn't really accurate because many of the, you know, the places where they put up a new job opening. That really isn't the case. They don't take the job opening down. That these job opening indications are not accurate. But nonetheless, you know, you'll hear the market talk an awful lot about it. Also, this week we're going to have factory orders. And it is important because again, our manufacturing numbers have been stalled for so many months. But here's the expectation, the forecast is that we're going to see a positive number coming off of a negative number from the last report that we had. So this is going to be important for the market.

Quincy Krosby:

We'll get the Fed Beige Book as well. And as I've said so many times, it is anecdotal from the Federal Reserve banks across the country. But this is key. Actually it is much more up to date than much of the data that we have. And we get a sense from the various Federal Reserve banks into hiring expectations. You know, what do they feel about inflation? Are they hiring? Which places are hiring? Remember the Federal Reserve banks go out and talk to the banks, they talk to the companies, small business owners, large businesses in their region. So it is again anecdotal, but it is more up to date. And this is why the market does pay attention to the Beige Book, but particularly when we are so concerned about the labor market. And that'll come out on Wednesday, as always, at 2:00 PM Eastern time. Then the big number, this is key for the market, key for the Fed's meeting coming up September 17 and 18.

Quincy Krosby:

It is on Friday. And again, as I said, the expectations are that we will have 162,000 new jobs, a touch higher than the last report, which was at 114,000 jobs. And as I mentioned, the expectations are, the forecast is that the unemployment rate edges lower right from 4.3 to 4.2. The other forecast is that wages will tick just a tad higher. Now the fact of the matter is, the last report indicated that hourly wages year over year came in at 3.6%. Expectations are that the hourly wages year over year compared to a year ago, would be up 3.8%. Now, also on Friday, we will have the head of the New York Fed, William, speak just after these numbers are out. And then later in the morning at about 11 Eastern, we will hear Christopher Waller speak. I'm going to pay very close attention to Christopher Waller because he tends to be pragmatic.

Quincy Krosby:

He tends to basically have a very good grasp on the data and basically on the Fed's view about how they absorb the data and how they assimilate the data. And remember what the market is very focused on. What does this do to expectations for September 18? 25 basis points, or are you going to go to 50? This is going to be crucial. Now let's keep in mind something, what the market wants above all else is that the Fed cuts rates by 25 basis points because inflation is coming down at an acceptable pace and that the higher for longer is just not warranted. That's what the market wants. What the market doesn't want, by the way, is the Fed to say, well, we're going to cut rates maybe by 50 basis points or whatever because the labor market is suffering. That is not what the market wants for obvious reasons.

Quincy Krosby:

And that reason is the consumer spending is going to be in trouble, and that's about 68% of our economy. So that's the issue here is that's why we're paying so much attention to the Friday report. Also, and Chairman Powell never mentioned this, by the way, he alluded to it. The 818,000 jobs from the benchmark survey. This is the prelim, preliminary, of how many jobs actually were not created from April 2023 to March of 2024. Nonetheless, he had the message. He saw the numbers, and even though they're preliminary, we will not get the final numbers until probably February of 2025. The Fed is concerned about the labor market. So is the market, so is the equity market, so is the bond market. And that's why these numbers this week are so important. But as I said, to wrap up, going into it, the forecast actually indicate better readings for the market, for the Fed, and for the overall economy. So thank you all very much. Have a very good week. We'll be back next week. Thanks again.

Quincy Krosby:

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Quincy Krosby:

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