Lone wolf. Or bear. Or hawk. Whatever...

A mere twelve individuals – all voting members of the Federal Reserve’s Federal Open Market Committee (FOMC) – are responsible for setting the Federal Funds rate.¹ That in turn gives them significant influence over market-based interest rates in the US and elsewhere, which in turn translates into significant power in charting the course of economic growth both at home and abroad. It’s no exaggeration to say that this Star Chamber of economists represents one of the most influential collections of brainpower – economic or otherwise – in the free world.

Little wonder, then, that their words and deeds are followed almost as closely as, say, Taylor Swift (who, by the Federal Reserve’s own estimates, did a fair job of stoking consumer demand all on her own last year with her massively impactful Eras tour, but I digress...)² But that tendency to hang on every word spoken, written or tweeted (...X’ed?) by the Federatti has placed Federal Reserve (Fed) Governor Michelle Bowman, who famously dissented from the Fed’s decision to cut rates by a half a percent a week and a half ago, firmly in the spotlight.

To her credit, Bowman has remained steadfastly in the “let’s go a little slower” camp, using no fewer than four public appearances since the Fed decision to reiterate her point that inflation remains high enough to warrant a go-slow approach – the most recent of those speeches coming just this morning.³ A small smattering of other voting members of the FOMC seem at least somewhat sympathetic to her views but have yet to fully join her side of the argument, leaving Bowman as the lone wolf (er, hawk?) in a flock of doves.

Because no other FOMC voter is willing to go as far out on a limb as Bowman, markets are now comfortable pricing in as much as 0.75% or 1.00% worth of rate cuts between now and Christmas, more aggressive than the most recent dot-plot published by the Fed in conjunction with its rate decision a week and a half ago and something that has in turn helped support continued the stock market’s upward momentum in spite of continued queasiness on the macro front. 

Having been handed my hat by the Fed’s super-sized cut earlier this month (I was already on “team Bowman” before she printed up the t-shirts, but whatevs...), I’ve given up the practice of second-guessing the market when it comes to Fed cuts. And I am sympathetic to arguments that the labor market and economy might be softer than is commonly understood, which would argue in favor of continued aggressiveness when it comes to rate cuts. But on the other hand, there are very real reasons to worry that the inflation genie hasn’t quite retreated all the way back into his lamp, including this line from last week’s flash Purchasing Manager’s Index (PMI) release from S&P global: “average prices for goods and services (rose) at the fastest rate since March...(lifting) inflation further above the pre-pandemic long-run average.”⁴ Yikes.

And, as semi-hawk (and fellow FOMC voter) Thomas Barkin points out, the worsening conflict in the Middle East could suddenly toss higher oil prices into an already volatile inflationary mix if the war gets much worse. If the economy is truly chugging along fine, wouldn’t it be best to get in line behind Michelle B. and take it easy, especially with a wild card like that hanging around to spoil the party?

For now, the market doesn’t seem to agree. And that’s fine – rates traders were more correct than the Fed on the way into this cycle, so maybe they’re more correct now, too. But I’d still be careful counting too many fed cuts before they’re hatched, especially because we’re headed into October – famous for surprising markets with all sorts of unexpected jump-scares.

...Before we leave the subject of monetary accommodation, Chinese officials lit the fuse underneath their markets on Tuesday with a barrage of monetary missiles designed to bolster demand in their moribund economy. The clear intent was to rescue the central government’s official 5% growth target by cutting official interest rates and lowering reserve requirements for banks. But some of the initiatives announced last week focused specifically on reinvigorating demand in a property sector that has been hammered for months, such as “guidance” suggesting that banks should lower rates on already outstanding mortgage loans (a tool that monetary authorities in less autocratic locales could only dream of wielding.) 

At the same time, though, Chinese authorities also proposed a stabilization fund that would allow banks to borrow from the People’s Bank of China and invest the proceeds of those loans directly into domestic stocks and bonds. Not surprisingly, that helped catalyze a big rally in Chinese markets: the benchmark Shanghai-Shenzhen 300 spiked 25% last week. That’s still roughly 30% below the market’s post-COVID peak in early 2021 and there are plenty of reasons to suspect that such efforts might fall short of their intended mark of rescuing China’s housing sector and keeping its pre-planned growth rate intact, but it was still enough to support a risk-on tone that extended well beyond the Middle Kingdom itself, including here in the US (even as it carried slightly inflationary overtones of its own.)

Meanwhile, closer to home, the macro data continues to paint a mixed picture. Home price growth has eased but still hasn’t gone into reverse.^5,6 That’s kept affordability stretched and buyers away, with new home sales dipping to an annual pace of 716,000,⁷ slightly better than expected but still not exactly robust. The housing recovery, it seems, hasn’t arrived quite yet even though the rate cuts have begun.

Elsewhere on the consumer side, incomes and spending continued to rise, but at a slightly slower-than-expected pace. Incomes were up 0.2% in August, about half as much as expected. Spending was light, too, growing 0.2% versus expectations of +0.3%.⁸ But that was still enough to cause the savings rate to tick lower to 4.8% - the lowest so far this year and a data point that runs counter to fears that a recession is coming (savings rates usually spike higher as recessions approach.)

Of course the reason savings rates tend to spike before recessions arrive is a growing fear among wage-earners that they might lose their jobs – which is perhaps the defining characteristic of ‘recession’ to begin with. And that, dear reader, brings us to our final contradiction of the week: consumer confidence. I’ve cautioned against reading too much into consumer surveys in the final weeks leading up to November’s election and I stand by that warning. Still, data inside Tuesday’s consumer confidence report from the Conference Board is worth highlighting: unlike the University of Michigan’s parallel survey, the Conference Board’s headline figure took a big dip lower.^9,10 But far more interesting to me is the fact that the number of respondents who consider jobs “plentiful” declined while the number who describe them as “hard to get” expanded.

That ratio – and the macroeconomic implications it carries – probably isn’t as sensitive as who’s leading in the polls as headline figures themselves. And it also presents an even bigger contradiction that only time will resolve.

What to watch this week

Welcome to payrolls week. Friday’s download of all things labor-related will test Chairman Powell’s conviction that his Fed eased by 0.50% because it could, not because it had to. If payroll growth comes in too high (or unemployment too low,) wonks will almost certainly argue that the “Fed’s fifty” was too much/too soon and is on the verge of reigniting inflation. On the other hand, if payroll growth flatlines (or if unemployment spikes higher,) another equally vocal contingent will argue exactly the opposite. Either way, nobody will be fully pleased or appeased by Friday’s release. I can see why the Chairman’s salary is so high.

As always, there will be plenty of employment-related data to keep us all busy in the run-up to Friday’s release. As has been true for a while, my preference is to spend the most brain cycles on Thursday’s layoff report from Challenger, Gray and Christmas. The advantage this survey has over other data is that it catalogs actual layoff plans as they are announced, not as they’re implemented. That gives it a natural forward-looking bias that isn’t evident in other labor market data, which captures unemployed persons only after they’ve left the building.

Other data worth watching during the labor-palooza is Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report (specifically watch for the “quits rate,” which is closely followed as an indication of how confident America’s workers are that they’d be able to secure a new job if they left their current one and could be an interesting cross-check on last week’s “plentiful/hard-to-get” ratio in the Conference Board’s consumer confidence survey.) Also of interest is Wednesday’s Pay Insights report from payroll processor ADP. While the firm’s payroll estimate is usually worth a look as a preview of Friday’s non-farm payroll number, it’s pay insight data gives a labor-focused look into the other main variable influencing the current environment: wages. In an ideal world, wages would continue to ease more or less in concert with inflation – too much on either side of the line risks upsetting the narrative. 

Speaking of labor, a contract covering more than 40,000 unionized dockworkers across the country expires Monday at midnight. That could paralyze ports up and down both coasts if the longshoremen vote to strike. The Biden administration has promised not to intervene, meaning that any labor stoppage could immediately snarl supply chains with uncertain (but certainly not positive) effect.

Beyond that, we’ll get final purchasing managers’ indices for both manufacturing (Tuesday) and services (Thursday.) Last week’s ‘flash’ PMIs from S&P global did little to change the view that manufacturing continues to slide even as the much larger (but less cyclically-exposed) services sector continue to pick up the slack. Read deeper into the details – especially those pertaining to prices – for a clearer view.