Historic Strike, Mixed Messaging from Fed Continues

The deadline has passed without a deal, resulting in thousands of dockworkers going on strike, the likes of which has not occurred since 1977. According to reports, nearly two-thirds of U.S. trade is set to be impacted, potentially affecting the delivery of everything from fruits to alcohol, to auto parts and Christmas trees. Estimates suggest the shutdown could cost $3.78B per week, or $540M per day. Again, according to reports, the dispute is primarily over future pay, with the Maritime Alliance, which represents terminal operators and ocean carriers, offering a 40% raise over the 6-year contract, while the International Longshore and Warehouse Union, which represents port workers all across the country, is looking for around double that for its workers. 

Yesterday, Federal Reserve Chairman Jerome Powell reiterated the lack of urgency in cutting rates. Speaking at a National Association for Business Economics (NABE) Conference in Nashville, Powell said the Fed is in no rush to cut rates given the stable and healthy state of the U.S. economy.  “Overall, the economy is in solid shape; we intend to use our tools to keep it there,” Powell said. He went on to say, “This is not a committee that feels like it's in a hurry to cut rates quickly.”

Speaking in a separate interview with Reuters, meanwhile, Atlanta Fed President Raphael Bostic said he would consider a larger second-round 50bp cut should the data – particularly the employment data – indicate a need for a further aggressive policy relief. “If the story is that inflation is continuing its drop and the labor market is staying strong, I think we have the luxury of being a bit more patient. If, on the other hand, the labor market comes in much weaker, I think that would add urgency to this,” Bostic said.

As we saw in the immediate aftermath of the September rate cut, while the direction of travel has been clearly indicated, when it comes to the speed of adjustment and just how low rates will travel, the Fed is far from one mind. Mixed messaging from Fed officials is further muddying the waters and undermining expectations, underscoring the uncertainty in the pathway forward, as each move remains “data-dependent.” 

The market, meanwhile, appears to be accepting a softer approach to policy, currently pricing In a smaller 25bp cut at the November 7 meeting with a 64% probability. By the end of the year, however, the market continues to expect about 70bps in additional rate cuts.

Also yesterday, on the economic calendar, the Chicago PMI rose from 46.1 to 46.6 in September, a three-month high. According to the median forecast, the index was expected to increase to 46.0 in September. In the details of the report, prices paid and supplier deliveries rose, signaling expansion, while production, inventories, new orders, employment, and order backlogs fell, signaling contraction.

Additionally yesterday, the Dallas Fed Manufacturing Activity Index unexpectedly ticked higher from -9.7 to -9.0 in September. According to the median forecast, the index was expected to decline to a reading of -10.8. September’s reading of -9.0, however, marks the 29th consecutive month of a negative print.

In the details of the report, employment rose from a reading of -0.7 to +2.9 in September, a two-month high. On the other hand, new orders fell one point to a reading of -5.2, and also averaging a reading of -5.2 over the past six months, production dropped from +1.6 to -3.2, and capacity utilization slumped from -2.3 to -7.0 in September, the fifth consecutive month of a negative reading. Also, the six-month general business outlook index slipped from +11.6 to +11.4 in September, the lowest reading in four months.

This morning, the final S&P Global U.S. Manufacturing PMI was revised up slightly from 47.0 to 47.3, still marking the lowest reading since February 2023 and the third consecutive print below 50 (signaling contraction).

Also this morning, construction spending, the August JOLTS report – or Job Openings and Labor Turnover Survey, and the ISM Manufacturing Index for September will be released.

In August, manufacturing activity rose 0.4 points to a reading of 47.2 in August. Despite the monthly uptick, however, this marks the fifth consecutive month in contractionary territory, or a reading below 50. In September, the ISM Manufacturing Index is expected to rise, albeit still remain in contractionary territory at a potential reading of 47.6.

Also this morning, overseas, a fresh round of inflation data shows Europe grappling with a similar mixed bag of price pressures as in the U.S. The headline CPI dropped to 1.8% in September, the first reading below the central bank’s 2% target since 2021. Core consumer prices (which exclude food, energy, alcohol and tobacco prices), meanwhile, came in at 2.7%, slightly below the 2.8% forecast expected, albeit still well above the 2% target.

Nevertheless, the market continues to anticipate further European Central Bank (ECB) action with a 25bp cut priced in for the next December meeting following two cuts totaling 50bps since July.  

Back in the U.S., tomorrow, weekly mortgage applications will be released, followed by the September ADP employment report.

Later in the week, on Thursday, weekly jobless claims, the final September print of the S&P Global U.S. Services and Composite PMIs, along with factory orders for August, durable goods orders, and the August ISM Services Index.

Like the ISM Manufacturing Index, the ISM Services Index unexpectedly ticked up in August, albeit minimally by one tenth of a point to a reading of 51.5, the highest reading since May. This month, the services index is expected to remain unchanged at 51.6 in September for a second consecutive month.

The main report of the week, meanwhile, comes on Friday with the release of the September nonfarm payrolls report. After a smaller-than-expected gain of 142k in August, nonfarm payrolls are expected to rise a similar 146k in September, potentially marking a four-month high. The gain would also potentially boost the three-month average, from 116k to 126k.

The unemployment rate, meanwhile, is expected to remain steady 4.2% for the second consecutive month, still well below what the Fed designates as the full unemployment range, and perpetuating the notion of ongoing tight-ish labor market conditions.

Average hourly earnings are expected to rise 0.3% in September, following a 0.4% gain in August, potentially resulting in a 3.8% increase over the past 12 months, potentially matching the 3.8% annual increase in August.  

Bottom Line: With a growing focus on potential weakness in the labor market, a weaker-than-expected read in Friday’s report will no doubt boost expectations for a more sizable Fed response come November. Equally, however, further indications of an ongoing solid or steady labor market coupled with still elevated prices will serve to underscore the need for a more tempered and patient approach to rate cuts going forward. 

On the Fed-speak front, today, Bostic and Cook take the stage, along with Cleveland’s Beth Hammack (who took the place of Loretta Mester last month). Tomorrow, St. Louis Fed President Alberto Musalem will give welcoming remarks at the St. Louis Fed Community Banking Research Conference and Governor Bowman will give the keynote address at the same Community Banking Conference. Later in the week, on Thursday, we’ll hear from Minneapolis Fed President Neel Kashkari, and finally, on Friday, New York Fed President John Williams will speak at an event at the New York Fed called “The Future of New York City: Focus on Jobs.” 

As noted above, already the array of Fed chatter and mixed messaging is underscoring the uncertainty in the Fed’s pathway forward and the lack of consensus among officials as the data continue to evolve. 

-Lindsey Piegza, Ph.D., Chief Economist