Federal Reserve Chairman Jerome Powell spoke last week at the Jackson Hole Economic Symposium. His comments were widely anticipated and eagerly watched by market participants.
His comments struck a balance between optimism and caution. On the optimistic side, he acknowledged that progress has certainly been made on inflation fight. However, he was quick to ensure caution (and avoid euphoria) as he stressed that such a decline in inflation could be temporary (given trendlines in GDP and spending) and reiterated that the Federal Reserve remains focused on its 2% long term inflation target. He noted that the Federal Reserve would consider further rate hikes if necessary to meet their objectives.
Perhaps his most notable comment was his statement that the Federal Reserve is “navigating by the stars under cloudy skies. We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”
The stars, of course, refer to the economic data that Powell has repeatedly noted are the driving force behind the decision to raise, keep steady, or lower or the federal funds rate. The Federal Reserve will be watching, waiting, assessing, and doing its best to interpret what the data means – no matter how conflicting (ie: cloudy) such data may be. This statement made it clear that the prior message of “data dependency” remains the Federal Reserve’s “party line”
More data (ie: “stars”) revealed themselves in the past week. Equity markets rallied and rates fell on the news, indicating that these “stars” may allow for the Federal Reserve to hold rates steady at the next meeting. Let’s take a look at the data that was revealed this week
Home data- pending home sales rose for the second month in a row in July, up 0.9%. This was far above the estimate, which was a decline of 0.8%. With mortgage rates at a 23 year high and housing supply at an all time low, the US housing market remains a source of concern
JOLTS (job openings) data – July JOLTS was a huge downside reading at 8.8 million vs 9.5 million consensus and 9.2 million in June. This was a shocking month over month decline. This data shows the jobs market has weakened significantly
Perhaps even more telling, after more than two years, the seemingly endless cycle of the so-called “Great Resignation” finally looks to be at an end. The quit rate fell back to its pre-pandemic rate of 2.3%. There remains opportunity as the data shows about 1.5 open jobs per unemployed worker. But that ratio is the lowest it’s been since September 2021. All in all, this data showed some much needed cooling in the labor market
GDP – The Bureau of Economic Analysis revised down its initial estimate Q2 GDP growth to a 2.1% annualized rate, from 2.4% previously. That’s still a tad better than the first quarter’s 2.0% real GDP growth rate but was a larger downward revision than expected. Meanwhile, the Atlanta Fed’s GDPNow model spits out a 5.9% growth rate for the third quarter. That’s based on the July and August data that has come in so far. A jump in growth of that magnitude would reignite inflation concerns – so GDP will continue to be a closely watched “star”
ADP jobs data – ADP private payrolls (which serves as a preview of Friday’s broader jobs data – see below) showed a slowdown in hiring to 177,000 in August, down from 312,000 in July, and missed the consensus estimate. Again, slowing growth in employment markets will provide cover for the Federal Reserve to hold rates steady
Core PCE inflation – The Federal Reserve’s preferred inflation gauge – the personal spending and income report – pointed to a slight rebound in inflation. July’s core PCE price index advanced 4.2% year over year, a slight uptick from the 4.1% seen in June. This was in line with expectations.
August jobs report – this will be released Friday September 1st (after this post is published) . Economists surveyed by FactSet expect the pace of nonfarm hires in August to slow to 170,000, down from the 187,000 reported the previous month. It wouldn’t, however, be a huge surprise to see even lower payroll growth in August given the ongoing strikes in California (Writers and Actors Guild and hotel workers)
Sifting thru this week’s data and the somewhat conflicting messages (inflation steady, job market slowing, housing strong, growth strong) shows how accurate Chair Powell’s description was. There are a lot of stars in the sky right now – and many more to come – as we travel towards the next Fed meeting and beyond. With any luck, the surrounding clouds will dissipate and the path forward will become clear.
Onward we go,
PS – wishing you all a safe and enjoyable Labor Day weekend. Friday Five will be off next Friday 9/8. Talk to you on the 15th!
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