US Economy: Key Macro Events This Week
This week's key events for the US economy include FOMC meeting minutes on Wednesday, updated CPI data for September on Thursday, and the Retail Sales figures on Friday. Here are some notes from Credit Suisse's report.
FOMC Meeting
At the September meeting, the FOMC raised their fed funds rate target by 75bps, or 3% in the last 7 months. Powell has been quite clear that his intention is to put the long-term health of the economy top of his mind in his effort to quash inflation before it gets out of hand; remarking that “I wish there were a painless way to do that. There isn't. We have to get supply and demand back into alignment. The way we do that is by slowing the economy.”
The last meeting demonstrated a hawkish shift in economic projections. Credit Suisse expect this tone to continue with "officials increasingly concerned about persistent inflation and showing a greater tolerance for economic weakness in order to bring inflation back down to target." It is thought that officials from both the dovish and hawkish ends of the spectrum are in agreement that rates have a long way to go before they become appropriately restrictive. Despite the strengthening Dollar reducing export demand, and helping with inflation pressures, officials have focussed on the labour market, aiming for a ~1% increase in unemployment by the year's end. This comes after data from last week showed that 263,000 jobs were added to the US economy in August, causing the unemployment rate to fall to 3.5%.
You might have seen some discussion brewing around the resilient unemployment rate in the US following the data’s release. There are two schools of thought on the unemployment situation right now:
Rising unemployment is good for the stock market because it validates the Fed’s decision to increase rates to stifle inflation. Less consumer demand, less spending, less inflation. Some joke that this means the Fed can pivot sooner too.
Rising unemployment is bad for the stock market becomes it implies the economy is contracting.
There are valid points on either side, and I don’t know which is correct. Meanwhile, Credit Suisse expect a further 125bps of rate hikes this year, followed by a further 25bps in the first quarter of 2023, bringing terminal rates between 4.5% and 4.75%.
CPI - September
Core CPI (excludes energy and food) in September is expected to remain elevated, growing 0.4% to 0.5%, MoM, after printing 0.6% in August. This would bring the YoY reading to between 6.3% and 6.5%. Headline inflation (inclusive of energy and food) is expected to climb less sharply, at 0.2% MoM after growing 0.1% last month; which would lower the YoY figure to 8.0% from 8.3%. Some context on those projections:
Sharp declines in gasoline prices are expected to help lower headline inflation.
Core goods inflation is expected to slow
Shelter & Travel services inflation is expected to keep the core CPI reading elevated
Mix of weak apparel retail sales and high inventory-to-sales ratios have created downward pressure on retail prices.
Wholesale prices for used vehicles have come down in past months, retail prices should follow.
New vehicle prices are likely to continue rising.
"We expect both rent and OER to grow 0.6% MoM, continuing their strong increases recently. Although home prices have started to decline recently as mortgage rates surged and demand slumped, this will translate into weakness in measured shelter inflation only after a significant lag." Meanwhile, prices for travel services are expected to rebound after declining in recent months as industry data for services like car rental, hotels, and air travel all registered increased. Services inflation exclusive of housing and travel likely remained elevated given strong wage growth.
FOMC officials have been explicit about their resolve to hike aggressively until actual inflation data start to soften. Results in-line with CS's forecast would be slightly higher than current consensus expectations and should strengthen the case for a 75bp rate hike at the November meeting, instead of a 50bp increase.
Retail Sales
The market expects retail sales to grow 0.2% MoM in September, after expanding 0.1% last month. Credit Suisse believe they will come in flat MoM.
Auto spending should be boosted this month as unit vehicle sales improved.
Gasoline spending will likely drag headline inflation significantly as prices declined on average in September.
CS expect spending to contract by 0.2% excluding auto and gas spending.• The sluggish spending on housing is expected to hurt demand for large durable goods like appliances and furniture.
Elevated inflation and tighter borrowing costs have led to a steep drop in sentiment, putting a ceiling on consumption growth.
Ex auto and gas, CS expects spending to contract by 0.2%. High-frequency card spending data showed a small decline in consumption in September.
Credit Suisse
I highly doubt any of this matters in a decade’s time. The 3 by 3 rule suggests that "If it's not gonna matter in 3 years, don't spend more than 3 minutes being upset about it.” Another way of saying don't get too hung up on short-term volatility if (a) you didn't overpay; (b) the fundamentals continue to improve and; (c) your duration is >3Y. Nonetheless, I wanted to share this with you anyway.
Thanks for reading,
Conor
Very informative macro summary. Thanks!
"If it's not gonna matter in 3 years, don't spend more than 3 minutes being upset about it.” <-- 🙏🤘