Weekly Market Outlook
PCE, jobs recap + light week ahead of FOMC
Welcome to December! We’re just a few days away from the Federal Reserve’s final rate decision of the year, and fresh off a fairly robust jobs report.
Here’s a recap of last week’s main events:
Quick rundown:
Core PCE +0.2% vs. +0.5% prev.
Personal Income +0.7% vs. 0.4% prev.
ISM Manufacturing PMI 49 vs. 50.2 prev.
Average Hourly Earnings +0.6% vs. +0.5% prev.
Nonfarm Payrolls 263k vs. 284k prev.
Unemployment Rate 3.7% vs. 3.7% prev.
Main Takeaways:
Core PCE inflation showed a greater decline than anticipated, but the market’s excitement was tempered by a stronger labour market update which showed the economy is still producing new jobs while maintaining a historically low unemployment rate. Equally important was the increase in hourly earnings.
In his speech at Brookings Institute, Jerome Powell made it clear that balancing the labour market is a juggling act which remains difficult to solve. Here’s some comments that stood out:
So while on the surface the numbers look good, there’s an underlying issue with workforce participation. Powell tied this shortfall to a decline in working population due to the pandemic, along with expedited retirements.
If companies can’t fill job openings, productivity will slow down, manufacturing will continue to decline, and inflation will cool off. In fact ISM Manufacturing PMI has now dropped below 50, signalling the first contraction in factory activity since May 2020.
Cracks in the job market and weakness in factory output serve as initial warnings of a recession in 2023.
Let’s take a look at this week’s activities.
ISM services PMI and Michigan Consumer Sentiment are the highest-impact events.
ISM Services PMI
Growth in the services sector has been in decline throughout most of 2022, but there’s not much to worry about unless we see this number drop below 50. It’s expected to remain relatively flat this month.
Here’s the recent trend on ISM Services PMI:
Michigan Consumer Sentiment
Consumer Sentiment is one of the more highly regarded studies as it includes very current data from recent interviews. It takes a temperature read on consumer attitudes toward their current and ongoing financial & income situations.
This number may show an upside surprise due to the recent jobs report. That could create somewhat of a risk-off event with implications for higher inflation.
Here’s the recent trend on MCS:
Finally, next week we have CPI and FOMC. Stay tuned for a big update on that.
A 50bps Federal funds rate increase is favoured at nearly 80% probability, and this week’s data likely won’t move the needle much.
Have a great week!
