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Look ahead to July 29, 2019 week: The FOMC meeting throws the July employment report in the shade

The July 29 week will be dominated by nervous anticipation of the outcome of the July 30-31 FOMC meeting. Expectations for a rate cut are nearly universal. Most of those look for a 25 basis point cut in short-term rates, but some are as aggressive as 50 basis points. The 2.1% advance estimate for second quarter GDP almost guarantees it will be the former.

None of the data between now and the meeting is likely to change policymakers’ views one way or another on the expected rate action, but it could alter how they assess the possibility of monetary policy actions in the near future. The dual mandate requires both price stability and maximum employment. Absent an exogenous shock, the US economy appears to be doing reasonably well on both. Other than one or two outliers, the FOMC consensus may well return to patience.

The two-day meeting will start on Tuesday and finish on Wednesday. The statement and implementation note will be released at 14:00 ET and Chair Jerome Powell will convene his post-meeting press conference at 14:30 ET. Without an update to the Summary of Economic Projections (SEP), questions from reporters will likely hammer on if and when the next rate action can be expected, and if the informal update to the FOMC’s forecasts suggest any change in the outlook.

Please see the Whetstone Analysis comment on the upcoming FOMC meeting from Monday, July 22.

The data on personal income and spending for June at 8:30 ET on Tuesday will include the PCE deflator. Aside from putting a final polish on the pace of consumer spending for the second quarter and indicating if the upward trend for wages and salaries has lost a step, the PCE deflator is the Fed’s preferred measure of inflation. The GDP price indexes signaled that some of the recent idiosyncratic factors that have restrained its take on inflation have faded. If the PCE deflator is moving back toward the 2% objective, it might encourage more policymakers to take a wait-and-see attitude before adding accommodation.

Also important for how the FOMC understands inflation pressures is the second quarter Employment Cost Index (ECI) at 8:30 ET on Wednesday. Evidence is lacking that higher wages and salaries, and benefits costs are leaking into overall inflation and threatening price stability. Nonetheless, persistent gains will keep awareness up that it could start to happen as businesses have fewer options about passing on the expense. Total compensation has been running at or just above 2.8% increases year-over-year for the past four quarters. The second quarter 2019 probably will not look much different, but there could be a slight dip if businesses are doing a little less hiring and therefore can pick and choose among applicants. Nonetheless, skilled workers may still be at premium.

The only headline piece of labor market data the FOMC will get before the meeting is the ADP National Employment Report for July at 8:30 ET on Wednesday. The ADP change in private payrolls isn’t the best predictor of the change in the BLS report. It’s been known to miss by a wide margin, although it usually signals the direction of the government numbers. The past two months it has undershot the data in the Employment Situation significantly. However, a look at the six-month moving average suggests that over time the two are closely aligned. The bottom line is that while private hiring has slowed from the heady pace of 2018 and is bouncing around month-to-month, the underlying trend is still more than able to absorb new workers into the labor force. The July number should be consistent with that.

The Challenger report on layoff intentions for July at 7:30 ET on Thursday is coming off a period where the level of layoffs announced was higher. Part of it was the continued contraction in the retail sector, but it also reflected some increased separation plans in other industries. Automotive saw a rise in the number of voluntary buyouts to move higher paid – and typically older – workers off payrolls so new workers could be hired at a lower wage. There have also been some adjustments was activity in the manufacturing sector cooled in late 2018 and early 2019. Nonetheless, the uptick in layoff activity is corrective rather than recessionary.

Initial jobless claims have moved past the noise of early July’s difficulties in seasonally adjusting the data and returned to a lower trend level of around 210,000-220,000. The data for the week ended July 27 at 8:30 ET on Thursday should be past that and remain consistent with low levels of layoffs.

The July Employment Situation at 8:30 ET on Friday is unlikely to repeat the stellar 224,000 rise in payrolls in June. Something near the 150,000-mark should be sufficient to confirm that hiring is still strong. There may be a hint that earnings are not rising as quickly as they were, but gains should still be solid. The U3 unemployment rate ticked up a tenth to 3.7% in June. It could give that back in the July data. In any case, will remain consistent with very little slack for the labor market. Workers at the margins are finding opportunities for employment, as well as those presently working changing jobs.

The main reason for elevated consumer confidence for the past few years has been the vigor in the labor market and consequent rising incomes, and solid expectations for business conditions in coming months. The Conference Board’s Consumer Confidence Index for July at 10:00 ET on Tuesday and the final University of Michigan Consumer Sentiment Index for July at 10:00 ET on Friday are expected to continue to reflect that. Readings for both should be off recent peaks, but with current conditions running at historic highs and six-month expectations moderate.

The ISM Manufacturing Index for July at 10:00 ET on Thursday could face a downside surprise. Data form the District Bank surveys for the factory sector are telling two different stories. In particular, the two that have the strongest correlation with the ISM number moved in opposite directions. Philadelphia points to activity returning to a firmer pace of expansion and the Richmond Fed suggests it might dip below the 50-mark for the first time since early 2016. I think that Richmond’s data was unusually soft and a one-off for July, but that doesn’t mean the ISM Manufacturing Index will gain much from the 51.7 in June.

The Dallas Fed’s Texas Manufacturing Outlook for July at 10:30 ET on Monday could help clarify expectations at the national level. If its general business conditions index starts to turn around from the -12.1 in June after -5.3 in May, it may signal some relief from recent uncertainties.

The Dallas Fed’s Texas Service Sector Outlook for July at 10:30 ET on Tuesday should add to the broader picture of moderate activity for the non-manufacturing sector.

With respondents from both the manufacturing and non-manufacturing sectors, the MNI-ISM Chicago Business Barometer for July at 9:45 ET on Friday will probably crest the 50-mark again after dipping below neutral in July.

New orders for factory goods in June at 10:00 ET on Friday should show that nondurables orders added an increase in dollar value along with the already-reported up 2.0% for durables. Petroleum costs were higher in June and will help push the nondurables component upward.

The NAR’s Pending Home Sales Index for June at 10:00 ET on Tuesday should remain within reach of the 105.4 posted in May. Consumers will be anxious to sign contracts on properties while mortgage rates are low and they can find the right property to purchases with greater affordability.

 

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