Key takeaways
- Consumer confidence posted an unexpected drop due to food and energy prices
- The latest jobs data also revealed job postings and resignation levels are at their lowest in two years
- The markets made some big daily gains as the news further encouraged investors to believe the worst of monetary tightening is over
Changing the course of red-hot inflation is a slow, strenuous process. That’s why 18 months after the Fed began its monetary tightening policy, we’re finally starting to see some lasting impact on jobs and consumer spending, both of which have remained remarkably stable until now.
With these two metrics at their lowest levels in two years, it’s imperative for the Fed to try and steer towards the fabled soft landing without throwing the U.S. economy into a recession. We’ve got the measure on whether that seems likely or if Powell is chasing a pipe dream.
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What’s the latest with consumer confidence?
August’s consumer confidence index result, released yesterday, wiped out the gains made over the summer. The Conference Board’s report arrived at 106.1 for the month, far below July’s downward revised figure of 114 and the anticipated 116 reading from analysts.
The Conference Board blamed volatile price fluctuations in food and energy as the reason for the downbeat result. “Consumers were once again preoccupied with rising prices in general, and for groceries and gasoline in particular,” said Dana Peterson, chief economist at the Conference Board.
As for consumer sentiment toward the short-term health of the economy, the expectations index dropped to 80.2, down from 88 in July. Survey respondents indicated jobs were harder to come by as the main reason for the decline. When the expectations index reaches 80 or lower, it’s typically a red flag that a recession is on the horizon.
What about the jobs report?
The jobs market has been resilient to the point of being a literal problem for the economy, with record unemployment levels not seen in decades and non-farm payroll data far outpacing expectations for months on end – up until last month, when it posted the second-smallest gain since 2020.
Now, it looks like the tide is turning even more. U.S. job openings dropped to their lowest levels in two-and-a-half years in July. The Job Openings and Labor Turnover Survey (JOLTS) report from the Labor Department revealed resignation rates have also fallen to their lowest levels since early 2021.
Job openings declined by 338,000 to 8.827 million on the last day of July, which is the lowest since mid-2021. The most significant drop was in the professional and business services sector, which saw a 198,000 decline. Economists had put the consensus estimate at 9.465 million job openings.
The labor market is still tight – there were 1.51 job openings for every unemployed person in July, compared to 1.54 the month before, which is still far ahead of the 1.0 – 1.2 range considered to show a healthy economy. But consumer confidence has retreated in line with the number of jobs available in the economy, which should help the Fed to restrain inflation without wage growth to worry about as much.
Wall Street’s reaction
Despite the relatively gloomy status update from the consumer confidence index, the markets shrugged off the negativity. Markets were up after the report, with the S&P 500 adding 0.5%, the Nasdaq up 0.8% and the Dow Jones gaining 0.4%. The jobs data further fueled optimism around interest rates, with the S&P 500 posting its best day since June 2.
The markets have had a dismal few weeks in August, which is never a good month for stocks anyway, but this time with added spice weighing on the markets. With bond yields shooting to their highest returns in decades and becoming an attractive option for investors, the Fed’s indication that more interest rate highs are on the way and China’s faltering economy left the S&P 500 down 3.9% in three weeks.
However, it seems to have turned a corner again thanks to another tech-fueled rally from Nvidia earnings. On top of stocks, the U.S. dollar is set to make a 2% gain in August, marking its best monthly performance since May. The 10-year Treasury note yield pared to 4.11%, with the two-year yield falling below 5% again.
Is there any other data about the U.S. economy’s health?
We’re expecting an update on jobs later this week, which is expected to unveil that 170,000 jobs were added by employers in August. The estimated figure reflects a further slowdown in hiring in the last few months. A crucial statistic will be unemployment and whether the figures spike, as the signs are looking at a soft landing for the Fed’s monetary tightening cycle.
Fed chair Jerome Powell didn’t pull any punches at the annual Jackson Hole speech and confirmed the focus was still on slowing inflation, with the battle far from being won. “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so,” he said.
It’s a fair comment when you look at the latest consumer price index (CPI) report results. Headline inflation reported a slight 0.2% increase, which was in line with analyst expectations, but core inflation (which strips out volatile food and energy prices) also gained 0.2% to hit 4.8%. It’s fine, but not great – and indicates there are underlying inflationary pressures in the U.S. economy.
All of this begs the question of whether the Fed plans to raise interest rates for the rest of the year, with the July meeting introducing the highest levels in 22 years. According to the CME FedWatch tool, the consensus is overwhelmingly in favor of rates holding steady at the next meeting in September, but November and December predictions aren’t as clear cut.
The bottom line
Consumer confidence falling and the jobs market wavering? Well, it’s actually considered to be a good thing in the grand scheme of bringing inflation back down to manageable levels. The reaction from the markets pretty much confirmed the thinking.
What’s crucial is to see whether these are short-lived blips and the jobs market continues to run hot, or if the temporary rise in gas and food gets baked into the consumer mindset and confidence rises again. But all things considered, things for the U.S. economy are looking cautiously optimistic.
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