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How to Tell Economic "Good News" from "Bad News"

Thursday, September 29, 2022

We see some fairly interesting economic data ahead of Thursday’s opening bell, including the most finely-tuned of jobs reports, a second revision for Q2 GDP and some price index figures ahead of tomorrow morning’s PCE Price Index release. In aggregate, early trading does not like the results: the Dow went from -220 points ahead of the prints to -370 now; the S&P 500 doubled its losses from -35 points prior to -70 points; and the Nasdaq has slipped from -130 points to -215.

It’s now everyone in the equities market's business what the Fed is up to, and right now we know the voting Fed members — once they are done doing the rounds of speaking engagements — are checking economic data for clues that its interest rate policy is meaningfully abating 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 their lowest level since March to 193K — back below 200K for the first time since the spring — and markedly beneath the downwardly-revised 209K the previous week. As the Fed looks for demand destruction to bring down retail prices, it also checks for weakness in the labor market to prove its tactics are in effect; this is the part of the equation not (yet) adding up on the Fed’s timeline.

For Continuing Claims, reported a week in arrears, we’re at 1.35 million — certainly a step down from the already-low 1.38 million the previous week, and the lowest weekly figure since mid-June. We’re also two weeks sub-1.4 million, which itself is an historically low level of longer-term jobless claims. Even when short waves of near-term layoffs are taking place, they’re apparently being absorbed quickly into another sector hungry for workers.

This is “bad” for the Fed because an employee’s market means demand for higher wages is still in play, and higher wages is a stickier aspect of inflation the Fed is likely growing more concerned about. This, in turn, might be bad for near-term markets because it reinforces the idea that the Fed is going to hike rates to such a “painful” level that demand destruction in the workforce will surely bring us to a deep-dive recession.

For the record, this is not necessarily true: currently, the numbers don’t add up in any other way because the Fed is still targeting 2% inflation. But what if, somewhat due to continued robust employment, something more like 3% becomes more reasonable from the Fed’s perspective? From that perch — still a theory at this point, let’s be clear — one can feel the market constraints easing up a bit. It would also take presumably less time to get to a higher targeted inflation level, and speed up the process to an economy cruising steadily higher.

The second revision to Q2 Gross Domestic Product (GDP) stayed pat with the first revision: -0.6%, as expected. We’re still at two consecutive quarters of negative GDP growth, with Q3 just coming to an end this week. Real gross domestic income, however, was revised much lower, from +1.4% to +0.1%. Real final sales to domestic purchasers performed better, swinging a -0.2% last time around to +0.2% on this revision. Dutifully restrained: “bad news is good news.”

However, the headline Personal Consumption Expenditure (PCE) Index came in at +7.5%, from +7.1% reported last time around. Sub-level consumption quarter over quarter 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”), though down from the cycle-high +6.1% in June.

Thus, our takeaway is that unemployment is shrinking to historic levels once again, and consumer spending is slightly stronger than previously believed. These lead to pre-market indices primed to give back a good chunk of yesterday’s gains, down triple-figures on the Dow and Nasdaq. This is textbook “good news is bad news.”

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