By Tiffany Wilding, North American Economist, and Allison Boxer, Economist, at PIMCO
Busy week ahead with important data releases and Fedspeak. There are 12+ Fed appearances scheduled in the last week before the blackout period, including a speech from Chair Powell on Wednesday. The first data releases for November are expected to point to slower activity, with a modest drop in ISM indexes and another slower month of nonfarm payroll gains.
This week’s data
The last few data releases for October should be solid. We look for core PCE inflation to rise 0.3% month-over-month (m/m) (slightly lower than 0.4% m/m consensus expectation), welcome news for Fed officials and in line with the softer message from October CPI. Meanwhile we think real personal spending reaccelerated in October, up 0.4% m/m on the back of early holiday shopping induced by Amazon’s second prime day promotional event. The second release of 3Q real GDP is also expected to be little changed (from 2.6% to 2.8% quarter-over-quarter seasonally adjusted annual rate), confirming a notable downshift in final domestic demand (1% growth through 3Q) in 2022. We are currently tracking 4Q real GDP growth of 0.5% quarter-over-quarter seasonally adjusted annual rate, as a reacceleration in consumption (2.5% quarter-over-quarter seasonally adjusted annual rate), is offset by weakness in the more interest rate sensitive investment categories.
We think ISM services and manufacturing indexes will both tick lower in November, following on from what has been yet another month of weak early PMIs. We’re looking for the manufacturing index to finally fall into contraction (49.7 ppts), while the services index drops to 53.6 ppts (which would be the lowest reading since May 2020).
We think the November employment report will show a further loss of hiring momentum. We’re tracking nonfarm payrolls at a below consensus 160k pace. We think a combination of stalled hiring across tech related sectors, as well as weakness due to slower than usual seasonal hiring across retail and related sectors. We are also focused on leisure hiring, which has been a strong driver of YTD job gains but softened in recent months. The loss of labor market momentum has also become more apparent across the various high frequency indicators, including last week’s jobless claims. More broadly, we are still concerned about a non-linear path for the labor market slowdown as pandemic-related backfilling fades and layoffs continue in sectors that over-hired over the past 2 years.
We continue to think there is very wide uncertainty on when this slowdown will actually become apparent in the BLS data, given how poorly high frequency indicators have worked for forecasting payrolls this year, and once again there is a wide range of forecasts (150k between highest and lowest estimate in BBG survey). Our forecast would suggest that the unemployment rate remains unchanged at 3.7% (in line with consensus), and that average hourly earnings tick down to +0.3% m/m (in line with consensus, from 0.4% m/m) thanks in part to negative calendar effects.
Reports out from Black Friday shopping are mixed so far. Mastercard pointed to a 12% year-over-year (y/y) pace of retail spending ex autos (roughly 3% m/m), while others including Adobe (1% y/y), Salesforce (9% y/y), and the National Retail Federation (6 to 8% y/y), all pointed to softer spending. For context, US retails sales ex auto were up 8.9% y/y in October. With more and more shopping shifting online and earlier in the holiday period, we’re seeing more divergence across the various trackers. We should know more in the next few days as more credit card data becomes available.
It’s the last week before the blackout period ahead of December FOMC. Chair Powell speaks Wednesday and we hear from various other officials throughout the week. We expect Chair Powell to guide towards a 50 bp hike at the December meeting, while emphasizing a higher level of Fed funds as more important than the slower pace.
November FOMC Minutes were in line with the split between hawkish and dovish leaning members in the statement vs. press conference. Fed officials saw firmer inflation justifying a higher Fed funds rate, while uncertainty about the significant tightening to date justified a slower pace of hikes going forward. We thought the minutes read more dovish than Powell’s press conference, consistent with the idea that the overall committee has a somewhat more dovish bias than the Chair. With inflation this high and the labor market holding up, it’s been easy for Powell to keep the overall committee in line as evidenced by the hawkish Fedspeak over the past few weeks.