@theMarket: Inflation Up, Jobs Down, But Markets Don't Care

Investors await next week's Fed meeting. The markets have already baked in a 25-basis-point interest rate cut. The wild card will be if the Fed cuts even more than that. The latest economic data make that less than a coin toss.

 

The Consumer Price Index for August hit the highest monthly reading since January, with the 12-month inflation rate up from a low of 2.3 percent in April. And yet, the August Producer Price Index showed a 0.1 percent decline, which was below the anticipated 0.3 percent increase.

 

At the same time, initial jobless claims on Thursday surged this week by 27,000, reaching the highest rate since October 2021. In addition, the government's non-farm payroll revisions for the last year resulted in a net loss of 911,000 jobs. The stock market hit new highs on the news. However, the sudden spike in jobless claims was due to Texas floods last month.

 

These opposing trends leave the Federal Reserve Chairman Jerome Powell in a pickle. Does he bend to the will of the president, a growing group of Fed board members,  and the markets that are yammering for several interest rate cuts, or does he hold back and wait for more data? Investor sentiment indicates that inflation is within "acceptable" tolerance levels, while employment is not.

 

Now, unemployment at 4.3 percent remains at what economists consider full employment. The administration's draconian immigration policies could at least partially explain the weakness in the jobs data. But I also recognize that the implementation of artificial intelligence into the workplace is beginning to impact hiring numbers, especially among college-educated job seekers. The risk that job growth may lessen in the months ahead may justify at least one interest rate cut, but no more.

 

My Consumer Price Index inflation forecast proved accurate as annual inflation accelerated to 2.9 percent in August, after holding at 2.7 percent in both June and July. This time around, housing prices were the culprit, while tariffs were not a factor. Further rate cuts would reinforce my expectations that inflation will continue to climb through the end of the year.

 

One wild card in that equation could be the Supreme Court ruling in November on Trump's emergency powers tariff case. A decision against him would likely unravel or delay much of the future price pressure that existing tariffs are creating. I suspect the Fed would want to at least wait until then before moving on to further monetary loosening. Markets appear to be entering a melt-up stage. The Fed is potentially beginning a cutting cycle while the economy is in a moderate growth phase. Nothing could be more bullish if this turns out to be true. We will know more on Wednesday when the Fed meets, and Chairman Jerome Powell gives us the central bank's latest view of both inflation and employment.

 

Worldwide, most equity markets are overbought but could remain that way longer than most can imagine. At this point, my advice is to stay invested, enjoy the ride, but expect a pullback.

 

I will be on vacation next week, so there will be no columns while I am away.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.