Ahead of the opening bell this morning, new Personal Income and Consumer Spending figures for October have come out, and both were better than expected: 0.5% on the Personal Income side beat the 0.4% expected and the 0.2% reported in September, while 0.6% for Consumer Spending topped the 0.5% analysts were looking for, as well as the 0.4% that came out last month.
Aside from better-than-expected consumer confidence (reflected in the consumption headline), wages & salaries ticked up 0.3% — which is consistent with what we’ve seen in monthly non-farm payroll numbers over the past few months: wage inflation finally accompanying robust labor market numbers that have been bolstering the economy for the past few years.
Core Inflation for October was in-line with expectations at +0.2%, above last month’s read of 0.1%. Year over year was a tick down, however, at 2.0% from the 2.1% consensus. Overall, what we’re seeing with these numbers is right in the sweet spot for the Federal Reserve in terms of U.S. monetary policy. It’s been a few weeks since we talked about “Goldilocks” numbers in macro economic figures, but this sure looks “not too hot, not too cold” from our current perspective.
The Powell Effect
Speaking of the Fed, the stock market had its best day in 8 months yesterday, celebrating what investors saw as Fed Chair Jerome Powell softening his language about future interest rate hikes. The chairman said interest rates are currently “just below” neutral, and with a new quarter-point hike imminent at the Fed’s meeting next month, what Powell essentially told the market yesterday is that the committee is “finished” raising rates, beginning in 2019.
Not that this should be taken as gospel, however — with a new 25% tariff potentially hitting the market in a cranking up of the trade war, this may result in a hit to the economy that higher interest rates may aggravate. Thus, what is more likely the Fed’s position overall, instead of being completely done raising rates, it instead reverts to a policy meme of former Fed Chair Janet Yellen, who said the committee’s decisions would be “data dependent.”
Perhaps we can scratch another quarter-point raise for next March off the calendar. But that’s not to say the Fed might not revisit the notion coming June-ish. In any case, what had long been considered a “neutral” rate was 3%; Powell yesterday inferred that figure is instead 2.5%. Perhaps the jury is out; it may depend solely on what Powell’s definition of “just below” is.
Also, new Thursday Initial Jobless Claims broke higher last week to 234K — out of the very low range of 200-225K for the first time in months. This is not to say claims are headed in the wrong direction in a larger sense; holiday months purge and hire temporary employees at an accelerated rate, thus creating plenty of static in these numbers.
Continuing Claims also ticked up to 1.7 million, which still at an historically low level. The U.S. employment market remains solid. Even 234K for the week is a healthy read, all things considered.