Stocks are lower as we head into the final week of the third quarter. Bonds and MBS are down. Again, this is not a US-centric phenomenon – global sovereign yields are up across the board.
The week ahead will contain a couple big reports, with the personal incomes and outlays report on the 30th which will contain the all-important PCE Price Index. The jobs report will come out on Friday. We will also get ISM data and home prices, the final estimate for Q2 GDP and consumer confidence.
The street is looking for a 0.2% MOM increase in the headline PCE Price Index and the core. The headline YOY PCE Price Index is expected to rise 3.7% while the core is expected to increase 3.3%.
For the jobs report, the street expects 162k jobs with the unemployment rate to remain unchanged at 4.1%.
Consumer sentiment fell in September according to the University of Michigan Consumer Sentiment Survey. This is the lowest reading in 4 months and is 15% lower than January. Deteriorating expectations for the future drove the decrease. Year-ahead inflation expectations increased from 4.0% to 4.6% while longer-term expectations rose from 3.3% to 3.4%.
Given that unemployment is sitting at 4.1% (a level that would have been unheard of in the 70s, 80s and most of the 1990s) consumers shouldn’t be so dour. What is the driver? Gasoline prices. Below I charted UMich sentiment versus gas prices. The blue line is sentiment while the green line (right axis) is gasoline. This is a very strong negative correlation. In other words, gas prices rise and consumers get surly.
Cleveland Fed President Beth Hammack said that inflation risks are tilted to the upside at an event on Friday. “Current conditions in the United States indicate that output is growing at a solid pace and the labor market remains close to my definition of maximum employment, but inflation remains elevated,” Hammack said in comments opening a conference at her bank. “The inflation outlook continues to be highly uncertain, with risks tilted to the upside” and “the longer that high inflation persists, the more challenging and costly it can be to bring it back down,” she said.
“The longer that high inflation persists, the more challenging and costly it can be to bring it back down,” said the Federal Open Market Committee voting member. “Because monetary policy affects the economy with long and variable lags, we need a reliable way to separate temporary moves in inflation from changes that are more persistent.”
She also said that the recent sell-off in the bond market does not reflect a loss of confidence in the Fed.
China and the US agreed to cut tariffs on some $30 billion of goods. China gets relief on toys and Christmas decorations (good timing) while the US gets relief on agricultural goods.
