How to distinguish economic “good news” from “bad news” – September 29, 2022

Thursday, September 29, 2022

We’re seeing some pretty interesting economic data ahead of Thursday’s opening bell, including the most accurate jobs reports, a second revision to Q2 GDP, and some price index numbers ahead of the release. tomorrow morning’s PCE price index. Overall, the early trades don’t like the results: the Dow Jones has gone from -220 points ahead of the draws to -370 now; the S&P 500 doubled its losses of -35 points before -70 points; and the Nasdaq fell from -130 points to -215.

It’s now up to everyone in the business of the stock market what the Fed is doing, and right now we know that the voting members of the Fed – once they’re done making the rounds of speaking engagements – are checking economic data to find clues that its interest rate policy is declining significantly. inflation. This includes domestic employment, which seems to have disappointed market participants this morning with its very good news (“good news is bad news”):

Initial jobless claims last week fell to its lowest level since March at 193K – back below 200K for the first time since spring – and significantly below the lower-revised 209K the previous week. While the Fed is looking for demand destruction to drive down retail prices, it is also checking labor market weakness to prove that its tactics are working; this is the part of the equation that does not (yet) fit the Fed’s timeline.

For Continuing claims, reported a week late, we are at 1.35 million – certainly down from the already low 1.38 million the previous week, and the lowest weekly figure since mid-June. We are also two weeks below the 1.4 million mark, which in itself is a historically low level of longer-term unemployment claims. Even when short waves of short-term layoffs take place, they are apparently quickly absorbed by another sector hungry for workers.

That’s “bad” for the Fed because the labor market means the demand for higher wages is still in play, and higher wages are a stickier side of inflation that the Fed is likely growing preoccupied. This, in turn, could be bad for markets in the near term, as it reinforces the idea that the Fed will raise rates to such a “painful” level that destroying demand within the labor force work will surely lead us into a deep recession.

For the record, that’s not necessarily true: currently, the numbers don’t add up otherwise because the Fed is still targeting 2% inflation. But what if, somewhat due to continued strength in employment, something like 3% became more reasonable from a Fed perspective? From this perch – still a theory at this point, let’s be clear – one can feel the market restraints loosening a bit. It would also likely take less time to reach a higher target level of inflation and accelerate the process towards a steadily growing economy.

The second revision of Second Quarter Gross Domestic Product (GDP) remained in place with the first revision: -0.6%, as expected. We are still on two straight quarters of negative GDP growth, with the third quarter just ending this week. Real gross domestic income was revised downwards, however, from +1.4% to +0.1%. Actual final sales to domestic buyers performed better, rising from -0.2% last time to +0.2% on this revision. Conscientiously retained: “bad news is good news”.

However, the title Personal consumption expenditure index (PCE) came out at +7.5%, compared to +7.1% last time. Quarter-over-quarter sublevel consumption was +2.0%, up from the previous +1.5%. Core PCE was +4.7% from the previous +4.4% – definitely up (“good news is bad news”), but down from the cycle high of +6.1 % in June.

Thus, our conclusion is that unemployment is shrinking again to historic levels and consumer spending is slightly stronger than previously thought. These lead to pre-market indices poised to return a good chunk of yesterday’s gains, down triple digits on the Dow Jones and Nasdaq. It’s the “good news is bad news” textbook.

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