Tag: economics

soft labor data, weak consumption, and subdued inflation

In the week just passed, without question, the most interesting developments and market relevant ones came from the economic data. First, we had the weekly ADP series, which showed the four week moving average at negative 13.5 thousand jobs. That marked the lowest since August. And given that it was for the week ended November 8th, it did provide the market with yet another reason to be concerned about the overall state of the employment market. It dovetailed well with the notion that the Fed will be cutting 25 basis points when it meets again on the 10th of December. Keep in mind that we will see the full November data series from ADP in the week ahead on December 3rd, and that will help level set expectations for the Fed.

We also saw a disappointing retail sales print for the month of September, which was not surprising to me as the two brokers with access to credit card data gave exceptionally low estimates. Here, the control group dropped for the first time since April, printing down 0.1% on a monthly basis. That was versus a 0.3% anticipated increase. Recall that this series is not inflation-adjusted, and as a result, when translating this back into real terms, the implication for real consumption will be even weaker.

PPI, particularly on the core side, came in below expectations as well, printing up just 0.1%. When combined with the CPI data we already have in hand, this gets us to a solid 0.2 for core PCE during the month of September, consistent with further disinflation.

The combination of soft labor data, weak consumption, and subdued inflation has strengthened market pricing for additional easing, driving a bullish Treasury reaction, particularly at the front end, with 2-year yields dipping below 3.50% and 10s gravitating toward 4%.

distributional challenge

If the headwinds for the labor market intensified into the end of the year, that could quite readily get the Fed back into rate cutting mode. There’s also this notion that the wobbles and the equity market have been sufficient to bring financial conditions back on the Fed’s radar and reinforce the idea of an insurance cut.

And it goes beyond simply the intuitive feedback loop between risk asset volatility and financial conditions and instead highlights the broader challenge that the Fed is constantly chasing in terms of needing to set monetary policy for economic participants that are not experiencing risk asset appreciation or the wealth effects influence to the same degree. Lower wage earners that obviously have less exposure to the upside scene in equity markets and are also facing the greatest job uncertainty and the most material impact in terms of household balance sheets from inflation are in a far different place in terms of the ability to consume and ultimately drive growth than a first or second quartile household who has realized impressive real estate appreciation, stock market appreciation, wage growth, and is probably a bit more secure in the employment market. Which of these categories is in the driver’s seat in terms of dictating how the Fed sets monetary policy? On the one hand, reducing restriction to acknowledge the challenges faced by lower income households will only then fuel easier financial conditions, higher asset prices, and an exaggeration of the wealth effect and consumption positive influences with what that means for inflation for upper quartile households. It’s this push and pull that is going to become especially relevant in 2026, given one, the outright level of stocks and two, the potential inflection point that we’ve reached in terms of the trajectory of inflation and the direction of monetary policy.

Actually, one of the reasons that the Fed is so focused on not the overall employment landscape, but specifically the unemployment rate, is that the unemployment rate, which is currently at the highest since October 2021, represents the most acute risk for the bottom quartile, i.e. an acceleration in unemployment that makes it more difficult for the low skilled, low wage earners to remain in the labor market. That would have a direct implication on consumption. However, we’re reminded that the top 10% of consumers account for 50% of consumption in the US., which indirectly begs the question, is the Fed the central bank to the entire economy or the central bank to the stock market? Or the central bank to the primary drivers of demand-side inflation?