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A slew of economic news this week will make it much clearer if the Federal Reserve will cut interest rates in March.
The Labor Department is due to release four crucial assessments of America’s job market, gauging labor demand, wage growth, productivity and hiring. And this week’s main event, the Fed’s two-day policy meeting, starting on Tuesday, should tell markets what to expect from the central bank in the spring.
That’s important because markets still see a roughly 50/50 chance of a March cut, according to futures — even though Fed officials have recently argued that’s too soon to begin paring back interest rates.
“After the markets identified a dovish pivot at the December meeting and central bankers went to great lengths to push this back, the upcoming meeting is a great opportunity to further manage expectations,” said Christian Scherrmann, US economist at DWS Group.
Kicking the week off: The December Job Openings and Labor Turnover Survey to be released on Tuesday is a report that’s been useful in illustrating the demand and supply imbalances in the labor market, specifically through the ratio of job openings to the number of unemployed people seeking work — a figure frequently cited by Fed Chair Jerome Powell.
That ratio reached a peak of two-to-one in the spring of 2022, but it’s since narrowed to 1.4-to-one in November. Openings have tumbled from their peak of around 12 million in March 2022 to 8.79 million in November as unemployment remains near historic lows.
According to FactSet estimates as of Friday afternoon, economists are expecting to see that job openings edged lower in December to 8.71 million. Observers will also look at the report’s layoffs and discharges measure for signs of a weakening job market. Layoffs have remained below pre-pandemic levels in recent months.
Wages and the Fed on Wednesday: The day after, the Labor Department releases its Employment Cost Index for the fourth quarter, a comprehensive measure of employers’ labor costs. The ECI steadily moderated throughout 2023, but some economists say pay gains are still a bit high and not yet consistent with 2% inflation — the Fed’s official inflation target.
Employers spent 1.1% more on wages and benefits from July through September than in the prior three-month period, a slight pick up from the 1% gain from April through June. Still, that’s down from the 1.4% increase in the first quarter of 2022. Economists expect the fourth-quarter ECI report to show a 1% rise from the third quarter.
Later that day, the Fed announces its latest interest-rate decision, which is widely expected to be to hold rates steady at a 23-year high for the fourth consecutive meeting. Investors will be paying close to attention to how the Fed characterizes the stance of policy, inflation’s improvement over the past several months, the economy’s recent pace of growth, and the state of financial conditions.
“At [this] week’s meeting we expect the [Fed] will turn to a neutral stance, conveying no bias to either tighten or ease at the subsequent meeting,” Michael Feroli, JPMorgan’s chief US economist, wrote in a note Friday. “We expect the forward guidance will be the main event next week, but there is also the rest of the statement to consider as well as the press conference.”
Feroli said that if Powell express something to the effect of “keeping policy restrictive until we are confident that inflation is on a path to that objective,” then that would be the Fed’s signal of not leaning toward cutting rates in March. Whether markets adjust their expectations accordingly is another matter.
Productivity data and the jobs report: Lastly, to cap off an epic two weeks of economic news, the January jobs report will gauge the health of the US job market in the first month of the year.
Monthly payroll growth has been robust in recent months with employers adding a strong 216,000 jobs in December as the unemployment rate held steady at a low 3.7% that month. The growth of average hourly earnings also remained above anything seen in pre-pandemic times last month.
Fed officials would feel comfortable seeing that job gains moderated in January. Economists estimate that employers added 170,000 jobs in January, according to FactSet estimates as of Friday afternoon, with the unemployment rate edging higher to 3.8%. That would be a welcome development for the Fed because it shows the job market is easing a bit, but not falling of a cliff.
Anything weaker than 170,000 jobs added could also be a good thing for Fed officials, as long as it’s above the minimum number of new jobs needed to keep up with population growth, which is somewhere between 70,000 and 100,000. The Fed wants to see a cooling job market because it could help facilitate slower inflation.
Economists, investors and the Fed will also sift through fourth-quarter productivity data to be released by the Labor Department the day before the January jobs report to see if it’s keeping up with wage growth.
US labor productivity, or nonfarm business employee output per hour, surged from July through September, rising at the fastest pace since the third quarter of 2020, helping keep inflationary pressures in check with wages also rising robustly.
Productivity not keeping up with wage gains stokes inflation.
GDP and consumer spending: Data last week were also revelatory. The first reading of fourth-quarter gross domestic product, the broadest measure of economic output, showed that the US economy continued to expand robustly — without inflation accelerating.
GDP in the final months of 2023 registered at a seasonally and inflation-adjusted 3.3% annualized rate, while the Personal Consumption Expenditures price index excluding food and energy prices held steady at 2% for the second quarter in a row.
Consumer spending in December was also solid, showing that Americans aren’t quite retrenching just yet, according to the latest monthly PCE report released Friday.
The last inflation snapshot of 2023 provided some further encouraging news for Americans and the Federal Reserve: This painful period of sharp price increases may be nearing its end, my colleague Alicia Wallace reports.
Commerce Department data released Friday showed that although the Federal Reserve’s preferred price gauge didn’t budge from its 2.6% annual rate seen a month before, a closely watched measurement of underlying inflation dropped to its lowest level since March 2021.
Additionally, the American household closed out 2023 on strong footing: Incomes and wages were up considerably from the year before, and consumers continued to spend heartily to keep the economy growing and casting aside recession fears.
“The American household continues to demonstrate resilience in light of these shocks,” said Joe Brusuelas, principal and chief economist at RSM US. “One can’t help but be somewhat optimistic about the American economy going forward, given the fact that we are at the doorstep of price stability, and the inflation fight has essentially ended.”
The Personal Consumption Expenditures price index — the inflation gauge that the Fed uses as its target rate — was up 2.6% annually in December, closing out 2023 with a softer punch than the 5.4% gain a year prior, according to Commerce Department data released Friday. December’s inflation reading is 0.6 percentage points from the central bank’s goal of 2%.
Excluding energy and food, components that tend to be more volatile, the closely watched core PCE price index rose 2.9% annually, a slower pace than the 3.2% rate seen in November.
The core PCE gauge is at its lowest point since March 2021. While the headline index is the official base for the target rate, Fed Chair Jerome Powell and other policymakers often highlight core PCE inflation as it’s generally considered a better signal of where inflation is headed.
Monday: Earnings from Whirlpool.
Tuesday: Earnings from Microsoft, Alphabet, Starbucks, UBS, HCA Healthcare, Marathon, General Motors, Cleveland Cliffs, Mondelez International and JetBlue Airways. The European Union’s statistics agency releases its first reading of fourth-quarter gross domestic product. S&P Global releases its S&P CoreLogic Case-Shiller 20-city home price index for November. The US Labor Department releases December data on job openings, quits, hires and layoffs. The Conference Board releases its January consumer survey. China’s National Bureau of Statistics releases January surveys of manufacturers and service providers.
Wednesday: Earnings from Novo Nordisk, Mastercard, Novartis, Boeing, ADP, Nasdaq and Nomura Holdings. The US Labor Department releases its Employment Cost Index for the fourth quarter. ADP releases its employment report for December. The Federal Reserve announces its latest interest-rate decision, followed by Fed Chair Jerome Powell’s post-meeting news conference.
Thursday: Earnings from Apple, Amazon.com, Meta Platforms, Shell, Honeywell, Deutsche Bank, Clorox, Quest Diagnostics, United States Steel and Peloton. The European Union’s statistics agency releases January data on inflation. The Bank of England announces its latest interest-rate decision. The US Labor Department reports the number of new applications for jobless benefits in the week ended January 27, along with fourth-quarter data on nonfarm productivity and unit labor costs. S&P Global and the Institute for Supply Management release January surveys gauging economic activity in the US manufacturing sector.
Friday: Earnings from Exxon Mobil, AbbVie, Chevron and Regeneron Pharmaceuticals. The US Labor Department reports on the state of the US job market, including monthly payroll gains, wage growth and the unemployment rate. The University of Michigan releases its final reading of consumer sentiment in January.
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