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- Gas and stock prices have an outsized influence on consumers’ confidence indexes, politics matters too.
- The expectations subindexes historically have been a decent guide to real consumption spending.
- Monthly swings in new home sales are mostly noise, but the trend is now flattening.
- Business CapEx looks to have stalled at the start of Q4, hit by rates and tight credit conditions.
- Equipment spending is on course to fall for a second straight quarter, with only modest gains elsewhere.
- Jobless claims surprised to the downside last week, but we expect a rebound in this week’s report.
- The upturn in jobless claims bears close attention, though it’s much too soon to panic.
- Ignore the wild durable goods headline; core capex orders are rising, but other data are less benign.
- Consumers’ sentiment likely will respond to cheaper gasoline; will inflation expectations do the same?
THE FED IS DONE, AND WILL START EASING IN SPRING...
- ...BUT THE FOMC WON’T ABANDON OPTIONALITY JUST YET
- The Homebase small business employment data point to a hefty rebound in November payrolls...
- ...But the margin of error in all payroll forecasts is huge; the seasonals are an intractable problem.
- No bottom yet for existing home sales, but supply is edging up, and valuations are falling as incomes rise.
- The supply-side factors we wanted to see in order to push inflation back down have all now normalized…
- Excess demand is the last piece of the jigsaw; the lagged hit from the Fed’s hike will take care of it.
- As demand moderates, gross margins will fall, pushing inflation back to target, and perhaps below it.
Layoffs hit 12-week high, but remain below cycle peaks, for now
- The rebound in jobless claims in recent weeks is not yet definitive evidence of a shift in the trend.
- The multi-family housing construction boom is over, though single-family starts are still rising.
- The steep drops in manufacturing output and homebuilder sentiment reported yesterday won’t last.
- The House Continuing Resolution kicks the can down the road to January and February; it solves nothing.
- October's retail sales numbers are consistent with a clear slowing in Q4 consumption growth.
- PPI disinflation continues; the October numbers, alongside the CPI, signal a 0.25% core PCE print.
Inflation? What inflation?
The (almost) final nail in the coffin of the Fed's rate hike optionality
Soft but stable; no rollover in labor demand
- Markets have broken decisively from the Fed; inves- tors no longer believe in rate hike optionality.
- Core CPI inflation ex-rents is now just 2.0% and fall- ing, and the pace of rent increases will slow sharply.
- We’re sticking to our call for the first easing in March, but we doubt Chair Powell will quickly declare victory.
- October’s core CPI probably rose 0.4%, but the risks are biased to the downside.
- Hotel room rates, health insurance and new vehicle prices all seem likely to have pushed up the core.
- Our medium-term optimism remains, but disinflation won’t proceed in a neat straight line every month.
- House Republicans are yet to coalesce around a funding plan that could pass the Senate…
- …That might change, but right now a government shutdown starting at midnight Friday looks likely.
- The spike in inflation expectations will reverse, but Fed policymakers will be unhappy in the meantime.
Nudging back up, but no sustained increase visible on the near horizon
- Households’ debt service ratios have edged higher since the Fed starting raising rates, but remain low.
- Debt service costs will rise further, but are unlikely to trigger sudden cuts to discretionary spending.
- Consumers’ sentiment likely improved in November, and inflation expectations probably fell.
- Our base case forecast is immaculate disinflation; no recession but inflation heading back to the target.
- The net risk, though, is of a steeper downturn as businesses react to margin pressure with big layoffs.
- In that case, inflation will fall faster and the Fed will cut aggressively, but credit and some stocks will suffer.
- Inventories are noisy and can’t be forecast with confi- dence, but signs point to drag on Q4 GDP growth.
- Real personal incomes after tax fell outright in the third quarter, but will rebound in the fourth...
- ...Spending, though, likely will head in the opposite direction, we see few signs of an impending rollover.
- The Fed’s Senior Loan Officer Survey shows slightly fewer banks are still tightening lending standards…
- …But on one is easing lending standards, and tight credit will constrain growth for the foreseeable future.
- Consumer credit growth likely rebounded in September, but the trend is slowing.