The week ahead will be dominated by the jobs report on Friday. We will also get ISM data and consumer sentiment. Oil is down after reports that Trump wants to try diplomacy again with the Iranians.
The midterm elections are on Tuesday and could potentially impact markets, but that is unlikely. The most likely scenario is that Democrats win the House and possibly the Senate, which means gridlock. Democrats in the House will spend the next two years investigating and impeaching Trump which will foreclose any possibility of bipartisan legislation.
A lot of tech bellwethers got slammed on disappointing earnings last week. We are in the heart of earnings season, with companies like Apple, Champion Homes, LGI Homes, Redwood Trust, Lending Tree, Loan Depot, Angel Oak, Finance of America, Equity Residential, American Homes 4 Rent, Zillow, Radian, MFA Financial, and UWM.
Employment costs increased 0.8% for the third quarter, according to BLS. Salaries rose by 0.7% while benefit costs rose 0.9%. For the full year, salaries rose 3.1% while benefits rose 3.9%. The ECI for the full year ending 9/30 rose 3.4%. Health benefit costs rose 6.4%.
Dallas Fed President Lorie Logan advocated for two more rate hikes in a speech on Friday.
Economic growth is strong. Consumer spending is solid, especially among wealthier households that have benefited most from the soaring stock market. And business investment is robust. While data centers get the headlines, manufacturers, defense contractors and energy companies are also ramping up investment.
A growing economy creates jobs, and the labor market is balanced and perhaps tightening a bit. Unemployment continues to hover just above 4 percent. That is down slightly from late last year and close to most estimates of the lowest sustainable level. On average, employers are adding at least enough jobs each month to absorb trend growth in the labor force.
Turning to price stability, the FOMC aims for an annual inflation rate of 2 percent as measured by the price index for personal consumption expenditures, or PCE. We have missed that goal for nearly six years. While inflation has come down from the post-pandemic peak, it is not yet headed all the way back to our target.
And skipping a meeting does not change the monetary policy destination. Indeed, by making the destination clear, the FOMC can better help the economy adapt and obtain the promised benefits of a skip. It remains clear to me, given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases. After that, it would make sense in my view to pause and examine economic and financial developments to determine what further action may be appropriate. The end goal should be to make policy modestly restrictive so we can sustainably deliver both maximum employment and stable prices. Of course, I will change my policy views if the economic outlook and risks change.
Odd that she sees the labor market tightening a bit after Microsoft offered buyouts to over a quarter of its labor force. We are seeing big job cuts in tech, and nobody is unaware of the cuts going on in finance, particularly mortgage banking.
Data center construction has been a big driver of the economic growth this year, and all the signs are pointing towards less construction going forward. Credit spreads are widening on data center debt and the politics of data centers mean more regulatory red tape. The costs of data center construction are rising.
The Fed Funds futures now have a roughly 25% chance that the Fed won’t hike in December, which is the highest in a while. That said, the March 27 and June 27 contracts do predict two more hikes as the base case.
The Chicago PMI dropped 3.5 points to 55.3 in October as supplier deliveries, production, new orders and backlog fell. Employment increased however. Supplier deliveries fell to the lowest level since February. while employment hit the highest level since April 2021.
Unfortunately, prices paid rose 8.9 points to the highest level since December 2021.
