Good Jobs, Weak Inflation Slow Fed
We have heard from several Fed officials this week, and though they didn’t go so far as to rule out a rate hike in October, that possibility is looking increasingly remote, especially given evidence released today that inflation continued to drop in September.
Thursday, October 15, 2015 - 00:00
The Consumer Price Index (CPI) dropped 0.2% last month, following a 0.1% decline in August, and this pushed the year-on-year change from August’s level of +0.2% to 0.0%. Things are more solid at the core level, which excludes the more volatile components of food and energy, rising +0.2% on the month for a year-on-year change of 1.9%. That is an acceleration at the core level, which will still keep talk of a December rate hike alive, but with the weak jobs report at the beginning of month, it is extremely difficult to see what evidence the FOMC could have seen since their last meeting to bring about a change of mind and opt to alter monetary policy at the October meeting, which begins in just 12 days.
Judged solely on the number of jobless claims, the labor market looks very strong. Initial claims fell 7000 last week to 255,000, matching the 42-year low set in July. This nudges the four-week moving average down by 2250 to 265,000, also the lowest since 1973. This compares favorably to how the four-week moving average was looking a month ago and would normally be considered a boost for the monthly employment report. The same could have been said heading into the release of September’s report, however, but we were surprised then by extremely weak payroll growth. Jobless claims have stayed low all through the summer, but payrolls for both August and September were anemic. September also had worrying symptoms of further slackening with a small drop in the participation rate and flat average hourly earnings. Unless we see a real reversal in these metrics in the October employment report, even a December rate hike may prove unfeasible.
Though the weakness in the September payrolls came as a big surprise, one indicator that did presage deep trouble was the Empire State Manufacturing survey, which came in at sharply contractionary level of -14.67 last month. Unfortunately, manufacturing conditions are still looking extremely weak for the New York region, despite some improvement from the September lows. The Empire State survey came in at a worse-than-expected -11.36 for October, suggesting the strength of the dollar continues to drag heavily on export markets and therefore manufacturers. The forward-looking component of new orders is in negative territory for a fifth successive month at -18.92, shipments were negative for a third straight month and employment at -8.49 has now had back-to-back months of contraction, while the workweek and delivery times have both shortened, conditions that are suggestive of a weakening sector. Later on Thursday we have the Philly Fed, which will afford us a further early glimpse of October manufacturing conditions. These regional surveys from the Fed are based on anecdotal evidence, but September’s hard data for the manufacturing sector is available tomorrow as part of the Industrial Production report. A 0.2% decline in manufacturing activity is expected.
The weakness of this morning’s data has not served to hinder stock prices, which opened moderately higher on Wall Street this morning. It is long-held tenet of the market that uncertainty is bad for the stock market and it may well be that today’s inflation data is so weak that it provides some reassurance in the form of securing more months of accommodative monetary policy. Shortly after the opening bell in New York, the Dow Jones was up 28 points or 0.17% at 16.952, while the S&P 500 Index advanced 0.46% to 2003.6.
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