Markets have a lot of resetting to do early this week to price impacts of the Israeli-Palestinian conflict that escalated this weekend. We will talk about potential economic impact and oil prices in a moment. First, we’re taking a quick dive into the more known numbers from last week’s economic data releases.
Payrolls came in way above estimates.
The biggest economic news from last week came Friday when the payrolls number released was 336,000— well above the consensus number of 117,000.
Due to growth in the labor force, the unemployment rate remained steady at 3.8%. Also, revisions to earlier months added 119,000 payrolls, making past months even stronger.
US Average Hourly Earnings continued to see monthly and year-over-year growth, while the Average Weekly Hours remained steady. While the growth is weakening, it is still positive.
When taken together, we’re seeing a growth in total payrolls, growth in hourly earnings, and steady weekly hours worked. All together, we’re expecting general strength in household wealth, which usually translates into expanded consumption and leading to stronger inflation. The Federal Reserve has stated on various occasions that a weakening payrolls number is something they are looking for to help end their tightening regimen. Therefore, we are expecting the Federal Reserve to tighten one more time in 2023 and continue to hold rates steady throughout 2024.
Middle East Conflict—it is still early to anticipate economic impact.
Massively escalated hostilities broke out in the Middle East over the weekend as Hamas launched multiple attacks against Israel. When conflict in the Middle East escalates, the price of oil tends to increase and (in the short term) money flows into US Treasuries, tending to lower their yield. Depending on how this conflict affects prices and consumption in the US, the Fed might hold things steady for the time being. However, it is still very early to see the economic impact of this latest conflict.
Manufacturing & Services
Last week, the other major piece of economic data was the Institute for Supply Management (ISM) readings on manufacturing and services. ISM Manufacturing rose to 49, while services declined 53.6.
Recall that any reading below 50 is contraction, while any reading above 50 indicates expansion. As the chart above shows, manufacturing is still in contraction—it is just contracting less than in recent readings, while Services is still expanding but at a slower rate.
Looking ahead, another interest rate hike is likely.
Overall, we are still expecting the Fed to increase rates one more time this year. And given the level in rates, we are expecting a mild recession in 2024. While a so-called “soft landing” is possible, that scenario would be dependent on steady declines in inflation, as well as maintaining positive growth in real earnings.
For the week of October 9th, the main economic releases will be consumer and producer inflation.
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