The twin most important events this week for the markets are likely to be CPI and the FOMC Minutes a day later. This is because the shocker of NFP on Friday has thrown the market rate calculus into disarray, and some additional insight is needed to ground expectations. Indices and currencies could jump around a bit ahead of the data as investors remain uncertain about what to expect.
Normally, the FOMC minutes are a smaller event on the calendar, as we already know what happened at the conclusion of the meeting. But this time around, the radical change in the data that underpins assumptions about the Fed has traders looking for new guidance. Specifically, what FOMC members were thinking about the employment figures.
The Big Shift
The jump in jobs numbers has a bit of crucial context. Earlier in September, Fed Chair Jerome Powell said that the Fed would have likely cut rates in July if they’d had the jobs data. We should remember that July’s NFP was shockingly low, leading to large dip in the markets, and an unwinding of the Japanese carry trade.
August numbers were also below replacement level (though revised higher), and in the interim overall employment figures were revised lower by over 800K. All of this pointed to a weaker economy that justified cutting rates. The Fed eased by 50 bps in September, which made sense for a quarter-point-per-meeting schedule starting in July. The Fed was playing catch-up. Additionally, between the July and September meetings, the dot-plot matrix shifted substantially from predicting just one rate cut for the second half of the year to predicting three cuts in the final four months.
The Swing Back
If this strong move towards easing was driven by the weakening jobs numbers of July and August, September’s banger of an NFP report would likely push for a swing back. Last time around, Board of Governors member Michelle Bowman dissented on the cut, instead voting for 25 bps of easing, the first dissenting vote in almost two decades. She argued that inflation remained persistent, and was more concerning than the jobs situation. The data so far, it appears, has supported her position.
Traders will likely be looking at the logic used by the voters in favor of the 50bps move to see if they are likely to join Bowman’s view that inflation remains persistent. One of the notable elements of the NFP report was that average hourly earnings accelerated above the core inflation rate, which implies that inflation pressures remain. So, how much weighting each FOMC member put on the jobs data as opposed to inflation will be scrutinized. Then the markets will have to evaluate how that fits into the US CPI and FOMC Minutes to be released one day later.
What the Data Says
US September headline CPI is forecast to dip back to 2.3%, down from the 2.5% in August that was driven by higher energy prices. Energy costs have been going down with crude pricing in an economic slowdown that would hurt demand. But, if the US economy remains strong, the stronger consumer demand could keep inflation also higher.
Core inflation is expected to continue its general trajectory lower to 3.1% from 3.2% prior. That might be enough to reassure investors that the Fed will keep easing, even though it might now be at a slower pace than initially thought.
