Jobless Claims Overshadows CPI

Where We Stand – Well, well, well. We came into Thursday eagerly anticipating the September US CPI report, only for the usually mundane weekly jobless claims data to steal the limelight. It seems that ‘Mr Market’ is having as much trouble balancing employment and inflation as the Fed are!

The reason for the focus on claims was simple – the data was considerably worse than anyone had expected. Initial claims rose by 258k in the week ending 5^th October, the biggest one-week rise since early-April, and well above the top of the forecast range. Continuing claims, for the week ending 28^th September, were also worse than expected, at 1.861mln, a 42k increase from the prior figure.

Thankfully, it is relatively easy to explain away this soft data. Initial claims rose for two reasons – firstly, the impact of Hurricane Helene resulting in a surge in claims in North Carolina, the most heavily impacted state, as well as in others nearby; and, secondly, an almost 10k weekly rise in claims in Michigan, which came by virtue of reduced shifts at auto giant Stellantis.

That said, there is a natural read-across here to next week’s jobless claims data, which will account for the impact of Hurricane Milton making landfall in Florida. Of note, next week’s initial claims print will coincide with the survey week for the October employment report, including the nonfarm payrolls print, substantially raising downside risks for the next jobs report.

Put simply, incoming US economic data is about to become very, very messy over the next quarter or so.

September’s CPI figures, though, mercifully weren’t especially messy, though the figures were marginally hotter than participants had expected. Headline CPI rose by 2.4% YoY last month, still the slowest annual pace since February 2021, while core CPI ticked higher to 3.3% YoY, from a prior 3.2%. On an MoM basis, both headline and core CPI metrics were unchanged from the pace seen in August, at 0.2% and 0.3% respectively.

On the whole, though, there is relatively little in the data that is likely to dispel the FOMC’s confidence in inflation returning towards the 2% inflation target over the medium-term. As a result, my base case remains that the Committee will deliver 25bp cuts at each of the remaining 2 FOMC meetings this year, with that cadence of cuts likely to continue into 2025 as well, until the fed funds rate returns to a roughly neutral level around 3% next summer.

Of course, were the labour market to materially weaken, likely defined as unemployment rising north of the 4.4% September SEP year-end forecast, the prospect of larger 50bp cuts remains on the table.

This, in essence, is the ‘Fed put’, which persists in a forceful and flexible form, and continues to provide participants with confidence to reside further out the risk curve, while also leaving equity dips to remain relatively shallow, and viewed as buying opportunities.

Atlanta Fed President Bostic did, though, give the market a bit of a jolt late on yesterday, noting his comfort with ‘skipping’ the November meeting, and holding rates steady if the outlook warrants it. While these remarks sent the buck north of the 103 figure, and sparked some selling pressure at the front end, some context is key. These comments come from a man who, as recently as July, thought that the FOMC should wait until December before delivering even a 25bp cut, only to then vote through a 50bp reduction three weeks ago. This flip-flopping serves nobody and nothing well, least of all Bostic’s own reputation.

Anyway, in terms of markets elsewhere, yesterday, it was a relatively choppy day, with the S&P 500 and Nasdaq 100 both paring knee-jerk declines on the soft jobless data as the session progressed. Crude rallied once more, adding around 3.5%, as markets continue to price an elevated geopolitical risk premium, awaiting the still-elusive Israeli response to last week’s Iranian missile attack.

Look Ahead – A relatively busy end to the week looks to be on the cards, with participants also having to grapple with potential gapping risk over the weekend which, of course, will be a long one in the United States, due to Columbus Day on Monday.

That gap risk presents itself in two forms, both amid the continued fluid geopolitical situation in the Middle East, and in the form of the scheduled press conference from China’s finance minister on Saturday. The latter is particularly important after Tuesday’s presser saw no fresh fiscal stimulus announced, and subsequently saw substantial selling pressure across the Chinese equity complex. One would imagine that the authorities would seek to avoid a repeat scenario, and at least bring some form of fresh measures to the table.

As for today’s docket, there’s plenty to get through.

This morning’s UK GDP figures should show the economy having grown at a monthly clip of 0.2% in August though, as any UK-based readers will know, the dismal weather seen during the summer probably leaves risks to that print tilting to the downside. In any case, HM Treasury are about to kill any economic momentum stone dead, with reports yesterday flagging the potential for capital gains tax to rise as high as 39% in the 30^th October Budget.

Elsewhere, the US brings us September’s PPI report, set to show factory gate prices having risen by 1.6% YoY last month, as well as the latest read on consumer sentiment from the University of Michigan. A couple of Fed speakers are also due this afternoon.

Meanwhile, the September Canadian labour market report should cement the case for a 50bp BoC cut in a fortnight’s time, with unemployment seen rising to 6.7%, despite the economy being expected to add just shy of 30k net jobs. Markets currently see around a 6-in-10 chance of such a ‘jumbo’ BoC cut.

Lastly, today marks the ‘proper’ start of third quarter earnings season, with JPMorgan and Wells Fargo set to report before the market open. Overall S&P 500 earnings growth is expected at 4.6% YoY in Q3, which would mark the fifth consecutive quarterly increase.