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Look forward at the October 28, 2019 week: FOMC decision arrives before the October Employment Situation

A look forward at the October 28 week naturally goes straight to the FOMC meeting on Tuesday and Wednesday. Although a rate cut is not a done deal, the Committee is widely expected to clip another 25 basis points from the fed funds target range from 1.75%-2.00% to 1.50%-1.75%. One reason the FOMC may be reluctant to take this step is that it may send a signal that the Fed’s concern about a possible recession is deepening while what it intends is to ensure that the present expansion doesn’t get to that point. However, the bottom line for the consensus of policymakers will probably be that the risks of recent months haven’t much changed, and that inflation is low and inflation expectations are softening. These are the reasons behind the past two cuts and are likely compelling enough to cause the FOMC to do the same again.

See the Whetstone Analysis “Preview: October 29-30 FOMC meeting likely to end with a rate cut — and more dissents in the vote” from October 25 and the comment from October 20 on “Fed policymakers have a lot of mull over before deciding the next move at the October 29-30 FOMC meeting”.

The data set for release before and during the FOMC meeting is not pivotal to the deliberations and should not change the outlook for the meeting.

While the advance estimate of third quarter GDP will be reported at 8:30 ET on Wednesday just before the FOMC will sit down for the second day of discussions, it would take an up- or downside surprise to make much difference.  Third quarter growth is expected to be slower than the 2.0% in the second quarter. Early forecasts put the median at up 1.7% within a range of up 1.2%-1.9%. This isn’t quite the same pace as the prior quarter. Neither is it a bad number this late in the long expansion. Consumer expenditures are expected to be the main source of growth.

Data on personal income and spending for September won’t be released until 8:30 ET on Thursday, after the conclusion of the FOMC meeting. The FOMC will not have the PCE deflator – its preferred measure of inflation – until after the deliberations. Even without it, policymakers should have a sense of the direction of inflation from the CPI and other indicators. That sense will be that inflation continued to run below the Fed’s 2% objective and sufficiently so that rate cut can be justified in a balanced approach to monetary policy even with so little resource slack in the labor market.

Another indication of price stability that the FOMC won’t have in time for the meeting is the Employment Cost Index (ECI) for the third quarter at 8:30 ET on Thursday. Employee wages and salaries have been rising steadily for the past couple of years, but those costs have not seeped into overall inflation. The same is true for benefits costs even as employers have responded to a tight labor market with offers of improved health insurance, time off, and other perks. In the third quarter, it is possible that wages and salaries have lost a little of their upward momentum while benefits will be more costly due to increases in health insurance premiums.

Policymakers will have a pretty good idea about conditions in the manufacturing and service sectors for October without the reports from the Dallas Fed. The Texas Manufacturing Outlook at 10:30 ET on Monday and the Texas Service Sector Outlook at 10:30 ET on Tuesday will complete the set of regional surveys from the District Banks. The last edition of the Fed’s Beige Book indicated that of the 12 District Banks, only Dallas was still experiencing overall moderate expansion – the firmest of the lot. However, the index for general business conditions in manufacturing has been barely growing in the prior two months and isn’t likely to rebound in October. The general business activity index for services in the Dallas District has managed to reflect mostly modest expansion in recent months that could start to fade as conditions turn lower at the national level.

The FOMC will have the NAR’s Pending Home Sales Index for September at 10:00 ET on Tuesday. This report could provide a clue as to whether consumers are still engaged in the housing market and ready to take advantage of low mortgage rates and good bargaining power on prices, or if the prospect of a recession is making them more reluctant to commit to a mortgage. For many, memories of the housing bust and Great Recession are still fresh.

The MNI-ISM Chicago Purchasing Managers Business Barometer for October at 9:45 ET on Thursday is not expected to climb above the 50-mark in October after the 47.1 in September. The region’s survey includes both manufacturing and services. Other regional reports suggest that neither industry is doing much more than treading water at this date.

The ISM Manufacturing Index for October at 10:00 ET on Friday may lose some of its impact as markets assess the Employment Situation set for release earlier in the morning. Regional numbers suggest that new orders are lacking, which means that shipments will be slower. Businesses have responded to slower economic conditions with a quick inventory correction. Delivery times have leveled off and are generally running near neutral at present. With the manufacturing sector already seeing two months of recession, employment isn’t likely to pick up.

The Conference Board’s Consumer Confidence Index for October at 10:00 ET on Tuesday should move up from the 125.1 in September. The index tends to alternate softer and firmer readings and September was a sharp downturn. The index won’t add much to the overall picture for consumer optimism which has remained solid in the face of a noisy news cycle due to the continued robust labor market.

Most of the indicators for the labor market won’t be seen until after the FOMC meets. The FOMC will have the ADP National Employment Report at 8:15 ET on Wednesday. Given the sometimes huge misses in the data compared to the government report on private payrolls, it will be taken with a grain of salt. Still, any hint that payrolls gains are eroding along with growth will be a concern.

The data on initial jobless claims for the week ended October 26 at 8:30 ET on Thursday could swing higher due to the teachers strike in Chicago. While the 25,000 teachers and 7,500 support staff are union members and therefore ineligible for unemployment benefits, there are likely to be a large number of short-term layoffs in ancillary workers who are idled by the strike. The noise in the data should not disguise that the insured rate of unemployment has barely budged from 1.2% since May 2018 and there is little evidence of slack in the labor market.

Challenger data on layoff intentions for October at 7:30 ET on Thursday could see a slight slowing from the prior month. September often sees increases due to the end of the fiscal year. These weren’t as obvious in 2019 as the level faded after a jump in August. In any case, I would be cautious about this expectation. It is reaching the time of year when businesses announce plans for the coming year and this is often the time when adjustments to payrolls become known. Usually this begins in November and continues into December. However, given concerns about an economic downturn, businesses may get a jump on this.

Last, and by no means least, the October Employment Situation at 8:30 ET on Friday is going to require restraint when the payroll headline hits the newswires. The UAW strike of 46,000 workers at GM is going to eat into overall total. Particularly for manufacturing payrolls, it is going to take a moment to assess how much of the impact is from the strike and how much is from contraction in the sector.  Overall private payroll gains may be disappointing. The government is adding jobs for the 2020 Census that will be around a while, but go away after the Census is complete. The unemployment rate is expected to move up a tenth from the 3.5% in September, still leaving the rate at near 50-year lows.

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