by Hubert Marleau, Market Ecnoomist, Palos Management
August 23, 2024
The Bureau of Labor Statistics (BLS) revised the employment numbers, as it does every year at this time, for the year ended March 2024, by 818,000 jobs, 30% less than what was originally reported. The revision showed that the labour market was never quite as hot as it seemed in real-time. The pace of hiring was 174,000 per month on average, 68,000 slower than previously estimated. Despite all the brouhaha surrounding the chaotic reexamination, which brought forward conspiracy theories that employment statistics were politically manipulated, it does not alter the probability of a soft landing as the base case. As it stands now, NowCasting models are predicting that the economy will grow at the annual rate of about 2.0% in Q3.
If anything, the cooler payroll data will ultimately work its way into a lower amount of hours worked, which in turn will bump up productivity gains even more than they already have. A rough calculation amounts to a 0.5% gain, which may have raised productivity to a y/y increase of 3.4% for the period under consideration. In this regard, the confirmation that the employment situation was cooler and productivity stronger than initially believed, should give the Fed officials a measure of comfort that they wouldn't be hasty if they were to start cutting interest rates as soon as next month and gradually normalise policy through 2025.
Indeed, I know of 3 monetary authorities (Patrick Harker, Susan Collins and Jeff Schmid) who think it is now appropriate to ease. At the Jackson Hole Symposium, Fed Chair Jerome Powell did not hedge: instead he unambiguously validated their reasoning, suggesting the time had come to adjust his monetary stance because the cooling of labour conditions was unmistakable and confidence had grown that inflation was on path to 2%. At time of writing, the policy rate (5.38%) is 170 bps higher than the neutral one (3.68%), a gap which predicts 7 interest cuts of 25 bps for the next cycle, which is to begin in September.
With 30% fewer jobs and perhaps as much as 0.5% more productivity than previously thought, traders largely expect (65% probability) a 25-basis-point cut at the upcoming September FOMC meeting, leaving a more robust 50-basis-point reduction point as a 35% possibility. The bottom line is that the stock market is betting on a continuation of the productivity boom and the bond market on continuing disinflation: a nice combo for sure. By the end of the day on Friday, the S&P 500 was up to 5635, registering a 1.5% weekly gain.
P.S. Price Gouging: Everybody needs to eat to stay alive. Thus food inflation can easily become a political hot potato as it is now. Many are putting the blame on groceries, arguing that they are price gouging. Really? Yes, food prices are much higher than they were pre-pandemic, but right now the pace of price increases is trending toward the Fed's desired 2% benchmark.
A few days ago, CEO Brian Cornell of Target argued: “There’s no room for price gouging in the super competitive business of retailing.” He might be right. Yardeni publicly posted a graph showing that the ratio of the CPI food at home to the PPI supermarkets & other grocery stores have been on a downward trend since the data started in 2000. The CPI measures prices paid by consumers, while the PPI measures prices received by businesses.
Thus this ratio is a proxy for the profit margins that groceries make. Interestingly, it defeats those who say groceries are bad actors because this ratio flattened during the pandemic, but has moved to new lows since then. Thus the blame for high food prices lies elsewhere - perhaps with agri-food producers. Meanwhile, investors should take note that there is empirical evidence and theoretical validity that price controls bring shortfalls of supply and reduction in quality. Think of Nixon’s fiasco in the 1970s!
Copyright © Palos Management
