Global Data Pod Weekender: Labor day

Welcome to the JP Morgan Weekender. This is the Labor Day edition and with me is Joe Lofton, a Joe Labor Labor Report for a Labor Day Weekender. This is like a, this is a really special moment here Bruce. Well, it's definitely Labor Day and we've had a Labor Market report. So we've got plenty to talk about around that. I mean, I guess I'll frame a little bit by just saying, you know, to me, it's been clear for a while that we'd have to have a much bigger energy shock for that to become a central factor in the in the growth outlook. And I think there's obviously still a drag there and we're kind of touching not too far from a hundred dollar on crude oil prices. So we can't ignore that entirely. But that to me right now is not the the issue. I think the issue is on the one hand the data flow is telling us that the global economy is carrying quite a bit of breath and and pretty strong momentum through the iron quarters of things are looking looking pretty darn good in the PMIs this week or certainly indicative of that. But we don't have the balance that we we want and that is to an important degree about, you know, making sure that households have some purchasing power off of this and the inflation story on energies is a problem. But the bigger issue has been the labor market. And you know, when we were sitting here looking at our forecast from last Friday, I was feeling concerned because not only had we had some slowing in job growth and not just the US but some disappointing outcomes around the world in the middle of the year felt like if we got the consensus or our forecast for 50,000 or so payrolls, we not only would be falling pretty short on jobs, but we'd be feeling even perhaps more so on the income side. And to me, what the, you know, the positive message from this report is not to take by any means the, you know, the job number in August at the face value 162,000 is not the right way to put your trend. But I think when you take the job surprise, you take the revisions, you take the work week, you take the wage numbers, you know, what you're seeing. And I think also importantly the components sectorally, I think you're seeing cyclicality in hours that's moving in a direction which is more consistent with what the economy is doing. The wage numbers have definitely hurt the income profile, but I think we're holding up okay on the income side. I think we're showing the cyclicality that tells us that yes growth is translating into jobs in hours. It's not where I kind of like it to be, at least not on the jobs front now, but I feel like we're kind of starting to make more sense here. And that to me takes away a concern. It doesn't add to the upside in any direct way. And then that allows us to have a conversation about whether the Fed is going to go in September, which is interesting as well. But before we, before we turn to that fun part of this conversation, let me just stop there. I mean, there's a whole bunch of other things going on in the world in and of what you want to highlight to start off here, but I'll leave it to you here. Yeah, I mean, I guess maybe just I would emphasize and maybe bring in some of the other data that we've had just quickly, but it just I think when we were walking home yesterday and maybe maybe viewers should know you and I live pretty close to each other. And we'd like to argue on the way home when we take the train together as well. So we don't we don't stop. It would be too much sharing you. But we were or I was saying yesterday, walking home like I feel like everything's falling into place. I can tell most of the stories around the world. I can tell parts of the US story, but the labor market story in the US seems just disconnected. And the irony of all of this was that when we set our year ahead outlook, you know, we've gotten you know, I unless you disagree, I feel like we've gotten a lot right in that year ahead outlook. And yet the what we viewed as the central linchpin of that working outright was that the labor market would start to pick up didn't seem to be a part of that. So I was just really puzzled and I was puzzled in large part of what you were touching on, which is how is it that the consumer just keeps spending and driving their saving rate lower and lower with no income? And you know, we put a piece out on this a couple months ago saying that this just can't keep going on. And yet it looked like it was going to keep going on a lot in the third quarter with weak labor income. And yet another quarter of pretty good spending. And I was just really scratching my head. And I know you were too. And then, you know, you come in this morning and now things kind of make a little bit more more sense. And you were quick to note in the payroll report that the real message of the pay report wasn't the jobs, but it was the income side of it. The fact that you had hours doing well with the work week and the work week really was an important part of the story. But also, you know, you put that with wages and you have a payroll proxy that instead of is running 3% is running 4%. So suddenly you start to feel like things are better. I don't think you've kind of like we're fully back on track. I think even in this world, you're going to have another big fall in the saving rate, which you have a you have an issue here. I mean, there's if I could just say one thing about the payroll report, which is I think the income stuff is the most important thing. But I think there's two other things here that do matter. One is the cyclicality of where you're getting the jobs that it's yeah, adding to a line with what I think is the cyclicality in the economy. We are getting hurt by the fact that the healthcare and education sectors, which had been holding up quite strong last year are now cooling. But the stuff, you know, like distributed trade, like goods producing industries across the board, like leisure and hospitality, they look like they're coming back here, which I I think is what you would want to see here. But the other thing just to kind of make the make the point, I think it is also encouraging to see that there is, you know, a broad degree of labor supply, which came back here, which is also one of the puzzles in the last few months is how much labor supply had kind of come off. So you're getting the cyclicality, you're getting the income, you're getting some labor supply, which tells you, I think the whole thing starts to fit together. Now, one word I could use in this now is kind of a sense of breadth. And I'd say it's not only the breadth that you're seeing in the in the US payroll report along the the different elements you just raised. And if you want to add one more, you can talk about the diffusion index in the good sector and, you know, everything kind of seems to be, you know, moving up. But I would also say there's there's breadth when you look outside the US, we tend to focus get caught in the the trap of only talking about the US, but we did have the PMIs this week. And the I mean the PMIs were, you know, it's one of those reports where it's just really hard to find anything not very, you know, that that would worry you in this. It was it was strong across the board, you know, you have services really moving up strongly. The manufacturing picked up and is kind of giving gave us a report that is consistent with our what I would say is a punchy 3% growth call for global industry. We seem to be tracking that quite nicely driven and part by the good story, but amplified by an inventory story. And the PMIs kind of solidified that, but that recovery and services, which had gotten very weak over the really the first half of this year, has been moving up for a few months now, made another big move up. And finally, for the first time in, you know, I guess maybe eight months or so, the services PMI is back above the manufacturing PMI. So that's a kind of a cyclical story that I would say is is important to reinforce the point you're making. Overall, the PMIs are tracking above 3% global GDP growth, which is stronger than than what our forecast is. You know, let me kind of just sort of make this point around that. It's just that there is an issue here, which is how do we explain how strong things are starting to feel. I mean, there's part of that is about, you know, you do a right to highlight the gap between the consumer and the live market outcomes underlying it. And we've made it feel, I think we made it feel more aligned if we're talking about a 2% consumer. I don't know, you know, Atlanta Fed is tracking now 3.5% consumer for the current quarter, and this is on the back of a 3.5% gain in the previous quarter. We're still not there in terms of the late market making sense to that kind of an outcome. And of course, if you look at the latest indicators of where, you know, CapEx is and business spending more generally. I mean, you know, is this global economy and US economy specifically just heck of a lot stronger cyclically than we we are appreciating at this point? Yeah, I mean, I didn't know how far you wanted to go down this road of quote, things to worry about. I feel like that's when you and I start to get into into more more arguments as you touched on the energy shock, which I think is I wouldn't use the word that it's modest. I would say maybe it's manageable, but it's it's going to be real. I think you have placed the appropriate concern around it up front. That, you know, you've got inflation that's probably going to be running close to four headline inflation be running for maybe over 4% in the coming coming few months here as things have have bounced back. That's going to be a big real purchasing power drag. And at the end of the day, you're you're right. Like if you've got a consumer spending real consumer spending running 3% and you've got your kind of real income numbers or your nominal income numbers probably running what closer close to four and you've got inflation running. I don't know on a quarterly basis, maybe not four, but something close to that. You're going to have real income that's going to be pretty weak here. I mean, I don't I don't quite get the 4% inflation right here. I mean, I see the inflation rate is going to be somewhat firmer, but I don't see enough in terms of what's moving here to get you. Well, if I look at our PCE inflation forecast, I see a two five this quarter and a four next quarter, which I assume is some monthly profile because you had some weakness earlier. Are you saying that you you you're doubting the 4% fourth quarter forecast? Maybe I'm not sure. Maybe that's right. I see the three month getting up to three six in September. Maybe that yeah. Yeah. So maybe I was exaggerating a little, but you're going to get close to four on a three month run rate. And maybe you can get your nominal income running close to four. That's going to be another. Yeah, I guess the point I would make here is that whatever the health and and well-being of the US economy and the better news on the labor market, there's no way we should be having three and a half percent consumption gains here. So, you know, we we smooth, we smooth. I think it's probably right to say the first quarter week outcome smooth with the second and third quarter. And if you smooth them, I think the the average there comes to something a little over two. Yeah. So, you know, whether it whether it starts in August, it doesn't feel like it's going to start in August because we've got a pretty decent card data signal on retail sales. But let's say it starts in September. So then you're going to have the consumer kind of come back to something more online. I mean, I guess I guess my point A would be that's perfectly fine if the consumer after the second and third quarter slows down to two percent will feel that slowing, but it's going to be very much consistent with an economy, I think, scrolling a little over two percent. But then the question is, are we wrong? No, I look, I guess this is what economists naturally do is they they see a good set of data and then kind of ask themselves what what could be wrong here. So I want viewers to kind of know that I think overall with this, we're feeling pretty good at the end of this week. And so now we're going to shift gears to saying, well, what should we be worrying about here? And, you know, I mean, yeah, you've got, you know, financial conditions that I mean, where mortgage rates are, you know, rising bond yields, those are, we don't really, well, I don't want to say we don't want to. I don't think mortgage rates matter here, Joe. I don't think that's an issue at all. Okay. I think the issue to my mind, I think interest rates are an issue, but I think that you're looking in the wrong place. I think the issue is between the dynamics on rising interest rates and repricing the Fed and the credit story, which is really a business credit story, which is now booming. It's at what point does that interaction start to become a problem? I think housing is just not important cyclically here. Well, yeah, I mean, it's, I don't know, like, when do I think it's going to take time? I mean, my point there is it's taking time and it's going to take Fed hiking to get you into position where those forces kind of create a problem for each other. And that, I mean, this is this is perhaps a transition to talking about the Fed. But what is the transmission of kind of higher interest rates if it's not affecting anything? Is it just through? So that's not that it's not affecting anything. It is affecting a lot of things. I'm just saying it's not going to work through housing. Yeah, housing is not everything in interest. Well, no, no, and it's even even less. I was just thinking that it does affect the things like mortgage payments and things, you know, so very, I mean, the housing transmission from monetary tightening is almost entirely from what it does to transactions, new activity. It doesn't really work through balance sheets, Joe. Yeah. So the way it works, in fact, if you think it goes the other way, I didn't, I didn't want to get hung up on housing. I was just referring to the fact that we keep saying, every time we talk about this, you keep saying mortgage rates. I think that's looking at the wrong place. I'm using that as a, as a, as a kind of a proxy for broader borrowing costs that go beyond the Fed. We, we, we almost exclusively talk about frontend Fed policy rates. We don't talk about the fact that borrowing costs are going up. Now, if you're going to tell me that housing doesn't matter and that access to credit is totally fine. No, I'm not saying that. That's not at all what I'm saying. I'm saying is housing doesn't matter. Yeah, yeah. I'm saying we're in a world right now. Well, then all I want to say is that there is a tightening and financial conditions. You've got to headwind from, from the, from the energy shock. I still am kind of, but you should realize you should realize that what's going on now and part of the reason why mortgage rates are where they are. Part of the reason why interest rates are where they are is because credit is growing very rapidly. Yeah. So you're, this is not, hey, interest rates are up. That's a tightening and financial conditions. This is a buoyant financial market environment that's increasingly becoming credit dependent. Yeah. And eventually interest rates are going to become a factor. And I think undercutting that, but that's not what's going on now. What now you're seeing is the credit lift. And you're seeing the interest rate responds to it. I also think there needs to be a Fed story here to really if you're going to start to get into a dynamic to say this stuff is going to become a problem. I think the Fed has to be part of the story. And it is in the sense that the market is reprised the Fed. We now have what almost two and a half Fed hikes priced in for the next 12 to 18 months. I think we need that the Fed can afford to be waiting here, right? Well, here we go. So let's just jump into the, into the September issue. Do you, well, I mean, I'll let you take it first and then I'll come in and give my perspective. Where do we stand on September? Well, I have to say, I mean, as someone, I think is at 60% after the barrel. As someone who's been on the hawkish side since the start of the year, I've always felt like September seemed early. I mean, it took Michael while to get there, but like the December call seems like appropriate. I, yeah, I'm not going to depend on the data flow, but what we're seeing right now, I think the case that, you know, wall are laid out, that weigh-ins have been weighed out, you know, that you're seeing kind of inflation come down. You've had two soft inflation prints. By the way, average hourly earnings were, I think tracking fairly soft here, right? Well, they're up to seven on the month. There was a slight upward revision to the past, but they're running three over, three one over a year ago. What? And they're running two, seven, tracking the quarter. Yeah, which so that keeps moving lower. I think you got the three-month, three-month is moving lower. The front month farmer, it was firmer and done for production workers. I mean, it's a little, I wouldn't call this a week, I wouldn't call this week relative. I didn't say week, I just met the direction of track. If I said week, I take it back. I didn't mean that. The direction of travel keeps, I said soft, so I take that back. The direction of travel is coming down and continues to move down, right? It's not like the second derivative of change, it just keeps moving down. And this is from someone who I think a couple months ago put out a note that I'm worried about tightening labor markets starting to put a flow. under that and rising. So it's not happening yet. I'm just saying if I'm in the shoes of clearly Williams and now what seems like Waller, I can point to this. I can say this is going to be another quarter of very strong productivity growth. Ergo unit labor costs are going to be very well contained and that's going to be coming down. I can point to two inflation reports and we'll see what we get next week. And so the idea of sitting there saying hey, can we wait one meeting here to see a little bit more because it seems like things are coming down. Is it really possible that Goldilocks is going to happen here? And I would probably lean in that direction. If you told me to have the meeting today, I'd say what's the rush? That what you think or is that what you what is that what you think? I mean, you described being just now what you were saying. It's clearly what Waller and Warsh and whatever the dovish end of the of the committee. I would. I would. I'm sorry. I said Waller. I said I'm at Waller. What Waller thinks. I did not we're going to start if you want to we're going to start playing the politics game or the kind of. No, no, I'm just asking. I want to make sure that the way you just described wages and inflation is the way you think. Just want to make sure that yeah, that's the way I would not describe that at all in that context. Well, so let me that's good. Tell me how you're thinking. Well, I think we're getting a disinflation off of a very high first part of the year. You know, I mean, when when when Waller says hey, we had four six in the first half and we're down to three on a three month basis. And we should feel good about that. I don't feel good about that. I came in thinking in order to be feeling good, we'd have to have the run rates on core PC, inflation running like lower than two and a half right now and we're not. And maybe we will after next next week's data, but I look at there being a persistence stickiness to inflation. I think of there being in the services space, which I think is not going to be brought down by labor costs, which I think are flattening out if I read the data as best I can at somewhere in the low threes in a world in which I think strong pricing power for the services sector and specific pressure points and things like healthcare are going to continue to keep keep that up. And then I see in the goods pressure space, significant reasons to think that core inflation is going to move up. So I don't feel confident that there's any kind of Goldilocks taking hold here. And I think, you know, what bothers me about Waller is he keeps getting into this mode when it's convenient for him to put a lot of weight on very high frequency movements, whereas if anything, we've learned in the last three or four years is to not get tied to a three month run rate on core inflation by itself. So I'm not I think Waller is Waller is sensitive to that Bruce. I mean, I think he this is why he's talking about waiting, but he's still waiting for it's hiking. He might be leaning to hiking, but he presented the case for patients. And I think the other side of the story, which if we're talking about Waller is his risk management, you know, is okay, let's let's give it a chance. And you could argue for that, especially given that the markets are not putting any real pressure on the credibility from the more medium term inflation measures. I don't have a problem with that. And then I certainly I'm not going to fight the argument about September and December. I guess where I'm going to argue for September is given what Worsh told us at Jackson Hole, given the way he wanted to present himself in terms of the independence of the Fed and the inflation fighting, you know, tough guy that he he is and given his description of the inflation news, he should go into September. I think almost independently of what the August reading is. Now I don't think that's quite the case. I think there's more sensitivity there. And I wouldn't push the argument about what he will do, but I think it would make a lot of sense for his career as Fed share to to come in and advocate for a rate hike. And I think regardless of what Waller may, you know, be be thinking as he sees the we news this week, I think if Worsh comes in and says, Hey, guys, I think we need to hike here. I think he'll have the votes to do it. So I think he can he can deliver a hike if he wants. Yeah, not for shifting years into like like what do we think they are the normative to the to the positive? Like what are they going to do? And I I agree it's it's more complicated. I mean, you you are saying that kind of Worsh boxed himself in a Jackson Hole. Frankly, I feel like he boxed himself in July because he did it's almost like what the compome did in Brazil, right? Like it kind of it hurt his credibility so much that it needs to hike, right? And I think it hurt he hurt his credibility so much in July. He needed to come out so hawkish at Jackson Hole to basically forward guide, even if I can say that. But now I mean, if you take that argument, it's not unreasonable, then he's got to follow through on it, I think. Yeah, no, that again, that the positive side of it is I can see that the only thing that would give me a little pause is it is a vote. And I'm pretty confident if Worsh came in and said, if folks we want to hike, they're going to be sympathetic to him. They're going to a lot of people on that committee will feel look given given the the advocacy that's coming from this administration. And particularly today's tweet on on interest rates. You know, the I think the argument for, you know, building your credibility, building your leadership is a strong one. And I think it would be, you know, received well. Yeah, I mean, I don't know how it's going to go. And I think that, you know, the number matters on Thursday and Friday mostly. Yeah, and we are looking for a to hear we can have people will probably want to know this. But like I, you know, what what number would get them to pause? What would get them to hike? I guess if you're just going to ask me first. Well, let's just say first, our forecast is for point two one on court. See, right. Yeah. I think I think if you get a low side to 10 side below 0.20. I would say it's over. I don't know. I want to say if it's below 0, that would be they would that would push them over the edge of staying on hold. In other words, like if you get a point one seven. And we're going to have a PPI as you, as you know. So let's assume that that's kind of consistent with some, I don't know. Well, the tricky part, Joe, is that in our forecast, and I have to check whether anything has changed this week is this is a forecast that was. Oh, it's it's it's it's a stale forecast. So I think we're going to have a point two three or point two four on court PCE tracking from the point two one on on core. Okay. So it's a small gap. So if I just use that gap and if we get like a point one seven and therefore a point one nine core PCE, I don't know that might get a point one seven and point one nine. I think they're on hold. I don't doubt. Okay. I was kind of humming it. I'm glad to hear you say that because I don't think you know low side point two. But that's a hard to imagine, right? I mean, that's not hard to imagine. That's why I would I think the odds of them going in September right now. I I'm kind of 50, little less than 50. I still think it's more likely to go on hold. Even though what I said is I think I think war should come in here and deliver this and but I'm not as confident that he will. And I think there is a greater bias here that we get a lower side core inflation reading than eyesight. Those are famous last words, of course. But you know, so if you're just take our forecast point two one point two three, I think it's it's close to an even call then. But I probably lean in the in the air and the direction of them being on hold. If you push that number up a few hundredths and like a point two four point two six, then I think they're hiking. Yeah. Um, so we'll see we'll see where the numbers come. This is the week where the translators between core CPI and core PCE earn their keep, right? Let's hope are going to get 24 hours, right? Uh, well, you have all the time in the world before the next week's FOMC meeting. This is what the fed is. Yes. Yeah. Yeah. Yes. Yes. Yes. Yes. That is the week in which they're really going to earn their team. Yeah. Um, I asked this question. Let's let's let's say I we should end here. Uh, just let's reset forecasts here. June of 2027, how many rate hikes from the ECB, how many rate hikes from the fed, how many rate hikes from the BOJ from from where we are today? Uh, can I just so we can level set for the conversation, are we gonna take yours and my kind of punchy cyclical uplifts as the take whatever you want, take whatever you want. - No, no, I know, but should we assert that? So let me assert that. So if we get our kind of punchy uplifts story, I think the ECB's got three to four more hikes. I think the Fed has three hikes. I think the BOJ has six hikes. - Okay. Okay. - Thousand by the end of '27, you said, right? - I was thinking, but no, by June of '26. - Oh, okay, what I just said was by N27, but okay, by June, maybe I shave off a hike from there. - I'm there by June for everybody, although I wouldn't probably have six from the BOJ by June. I'd have four or five, but others I'd be, okay. Saying by June. - Yeah. - So, okay. Let's, let's see. - That would put us above pricing. - Yeah, I'm not sure for the ECB, the ECB I think is pretty much in pricing at this point, but the others would be above. So, let's leave it there though and say, hope that everybody has a good Labor Day holiday and hope that we can actually have a nice conversation next week at this time, the weekend.