As The Data Rolls
The morning of September 5th was a fairly active day for economic data releases. The ADP employment survey had forecasted 145,000 jobs and the print was 99,000, with a downward revision of 11,000 for July[1]. Non-farm productivity was flat with expectations, while unit labor costs came in at 0.4% versus the expected 0.8%[1]. So, we have a softer employment picture and lower wage costs. This certainly sounds like it matches the Fed’s view that inflation continues to moderate. The S&P Global US Services PMI came in at 55.7 versus an expectation of 55.1[1]. Anything above 50 indicates a market expansion so the service economy is growing faster than expectations. Perhaps, for me at least, the most troubling statistic is that ISM Services Prices Paid came in at 57.3 versus 56.0[1]. As the U.S. has become more of a service economy versus a manufacturing economy, what happens in services, the demand for services, and the prices paid for services are collectively more impactful than manufacturing. September 5th’s morning release shows that the service economy is growing faster and costing more than expected.
In past inflation cycles, there has often been a second mini-inflation streak once the Fed has gotten the initial inflation wave under control. When I look at what is happening in service demand and cost, it does feel like there is a real possibility for a second inflation wave. It is for this reason that I think the Fed is more likely to cut rates by 25 basis points versus 50 basis points and will stay true to form on their data dependency. The last thing Powell & Company want to do is to lower their guard on inflation and enact rate cuts that will only serve to inflame the very inflation they are trying to tame.
I have been watching Nvidia because of its incredible performance and how it has become a bellwether for the tech sector. After falling below $99 on August 7th, the stock ran up to $130 just 12 days later and has fallen back to $107 as I write this on September 5[1]. Stocks have taken a bit of a breather thus far in September and are down about 2.75%[1]. When we look at the bond market, the 10-year Treasury had its’ closing high in 2024 of 4.71% on April 25th and it is trading at 3.73% today, it’s low for the year[1].
We have a few things at play here. Inflation may be falling, but there are certain signs it has not fallen enough yet. We have slowing manufacturing, a weakening employment market and generally declining inflation while we still have growing costs for services coupled with high demand. All is not clear on the inflation front and it will likely cause the Fed to be measured in cutting the Fed Funds rate. More to come.