Federal Reserve Chairman Jerome Powell’s annual address in Jackson Hole, Wyoming, on Friday laid out three tests that incoming data must meet to avoid additional interest rate increases. On Tuesday, the Employment Opportunity and Employment Turnover survey successfully passed Powell’s test, as employment opportunities fell to their lowest level in more than two years. The S&P 500 rose as the 10-year Treasury yield fell on Tuesday.
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Next: The Fed’s core inflation rate, PCE price index, will be released on Thursday at 8:30 am, followed by the August jobs report on Friday morning.
On Wednesday morning, payroll processor ADP estimated that private sector companies added 177,000 jobs in August, the lowest level since March. That’s still more than the 147,000 private sector jobs projected in Friday’s report. However, the ADP estimates do not track Labor Department data closely on a monthly basis.
After the ADP employment report, S&P 500 futures pointed to a slight uptick in stock market action early Wednesday.
Job opportunities fall
The Labor Department reported that declared job openings fell by 338,000 in July to 8.8 million. This is the lowest level since March 2021, before inflation picked up. The June data was revised sharply to 9.165 million from the 9.582 million initially reported.
Meanwhile, the job turnover rate, that is, the percentage of workers who quit their job in a given month, fell to 2.3%, the lowest level since January 2021. The job turnover rate peaked at 3%. It has not fallen below 2.3% since September 2020. It is fair to say that the so-called “great resignation”, which helped drive wage growth, is over.
The smoking cessation rate is now in line with the pre-pandemic range of 2.3%-2.4% in an era of low inflation.
“The job market has largely returned to pre-pandemic conditions,” wrote Julia Pollack, chief economist at ZipRecruiter. She added that the cooling conditions “will be a relief to many employers.”
The Conference Board’s consumer confidence survey has backed a return to more normal conditions. The share of respondents who see jobs as “plentiful” fell to 40.3% in August from 43.7%. Meanwhile, the percentage of those who say jobs are “hard to get” rose to 14.1% from 11.3%. The spread decreased to 26.2%, which is 6 percentage points lower than the February 2020 reading, noted Barry Knapp of Ironsides Macro Economics.
However, according to one of Powell’s favorite measures, the labor market has not fully returned to pre-pandemic standards. There are still 1.5 unemployed workers for every job opening, with 3 million fewer people out of work than job vacancies. The ratio of unemployed workers to job openings peaked at 1.2 before the pandemic.
The odds of a Fed rate hike are dropping
Powell devoted much of his speech on Friday to the upside risks to inflation. That was a change from the measured tone he adopted on July 26, after the Fed’s last rate hike. “We’ve come to a place where there are real risks on both sides,” Powell said.
The more hawkish Mel Powell comes amid “signs that the economy may not calm down as expected.” He pointed to recent strength in consumer spending, above-trend GDP growth and housing activity rebounding from low levels.
The Fed chief did not go so far as to suggest the possibility of further rate hikes, but made it clear that the status quo will not be enough. The result: the economy needs to cool off very quickly because the Fed has run out of patience.
The odds of a rate hike by the November 1 meeting rose to 62% on Monday, but have since fallen to 41% amid evidence of a slowing labor market, according to the Fed. CME FedWatch tool.
Powell’s Three Tests of Economic Data
Here are the three Powell tests to keep in mind when reviewing this week’s dataset.
“Additional evidence of sustained above-trend growth could put further progress in inflation at risk and could call for further monetary tightening,” Powell said.
“Evidence that labor market distress is no longer abating could also call for a monetary policy response,” he added.
Powell also continued to focus on inflation in non-housing services, such as haircuts, health care and hospitality. Powell said that although inflation has fallen, there has been only modest progress in this category. He noted that this may reflect the labor-intensive nature of service sector companies.
“Given the size of this sector, further progress here will be necessary to restore price stability.”
PCE inflation and jobs reports
This week’s data will update the progress of all three major Powell tests.
Forecasts for third-quarter GDP growth could change with the Commerce Department’s personal income and spending report for July. After the Hot Retail Sales report, we will take a broader look at Personal Consumption Expenses, with service sector expenditures included.
Thursday’s PCE data also includes the Fed’s core inflation rate and the PCE price index.
Economists expect a solid 0.6% rise in personal spending. Core PCE price index is expected to have increased by 0.2% on a monthly basis. The annual core inflation rate of personal consumption expenditures is expected to rise to 4.2% from 4.1%. Wall Street will also pay close attention to prices for non-housing services, which is Powell’s third test.
Today’s JOLTS data and Friday’s jobs report will follow Powell’s final requirements: that labor market tightness needs to continue to ease. Powell wants to see the unemployment rate rise from 3.5%.
Also, a slowdown in monthly job growth should help the labor market find balance. Wall Street expects a payroll increase of 170,000 for the month of August and a flat unemployment rate of 3.5%.
The rise of the S&P 500 faces an economic test
The S&P 500 rose 1.45% to 4,497.63 during stock market action on Tuesday, while the 10-year Treasury yield fell 9 basis points, to 4.12%.
In addition to the economic tests this week, the S&P 500 faced a technical test as it aims to regain its 50-day moving average. On Tuesday, the S&P 500 rose above this key level near 4,460.
More evidence that a soft landing for the US economy is at hand may be needed to allow the S&P 500 to continue its climb. Make sure to read the big picture of IBD each day to stay in sync with the market trend and what it means for your trading decisions.
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