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High PCE and firm worker compensation point to 75 bps hike

The Bureau of Economic Analysis (BEA)  reported that the Fed’s favoured inflation gauge, the headline personal consumption expenditures price index (PCE) was up 0.3% in September (the same as August), and 6.2% Y-o-Y.

This is still far above the Fed’s 2% target, indicating that the monetary authorities will continue to tighten.

Source: US BEA

The core PCE (which excludes volatile items such as food and energy) rose 0.5% on a monthly basis, and 5.1% Y-o-Y.

Of crucial importance to Fed policymakers, a new report published by the Bureau of Labour Statistics (BLS) also showed labour costs rising at a firm pace in Q3.

The much-awaited Employment cost index, a measure of wages and benefits rose 1.2% during Q3 on a Q-o-Q basis and was marginally lower than the 1.3% registered in Q2.

On an annual basis, employee compensation was up 5%. Wages and benefits rose by 5.1% and 4.9%, respectively.

The marginal slowdown in total compensation from 5.1% in the previous month was driven by smaller advances to private sector employees.

Private sector wages in the quarter ending September did moderate from 1.6% in June to 1.2%, although healthcare and education showed faster growth.

Some recruiters also noted a slowdown in hiring and falling headcounts, which is in line with the Fed’s primary goal to ease price pressures.

Following the elevated PCE, persistent though easing labour shortages and a very low unemployment rate (which I covered in this article), the Fed is widely expected to raise rates by 75 bps for a fourth consecutive time.

Ian Borden, the CFO of McDonald’s Corp, believes,

Company operated margins remain pressured by significant commodity and wage inflation as well as elevated energy costs… will continue to impact margins for the next several quarters.

Personal spending data

As per the BEA, personal spending rose by 0.6% in September, which was higher than market estimates, despite the high inflation and interest rates.

Christopher Rupkey, chief economist at FWDBONDS said,

Americans may say they are worried about inflation, but they are still out shopping which keeps the economy growing for another quarter.

However, on adjusting for inflation, spending rose just 0.3% while disposable personal income was flat (which had increased 0.4% in nominal terms during the month).

The Michigan Consumer Sentiment Index also increased 59.9 or 2.2% since September. Although an improvement, this is only 10 points above the historic low and we could see a slowdown in spending moving into the holiday season.

Interestingly, lower-income consumers showed an improvement in sentiment, while households that have wealth in equity portfolios and housing, witnessed a sharp decline. I also wrote about the crisis in housing earlier this week, which can be accessed here.

Outlook

Given the high PCE, the Fed is unlikely to alter its rate pathway, and markets can expect a 75 bps in its meeting next week.

As per the CME FedWatch Tool, at the time of writing, there is an 82.5% probability of a 75-bps hike in the coming meeting.

A decline in new orders of nondefense capital, a gauge of business investment as well as the weakening worker compensation suggests that the Fed may begin to slow its rate hikes during the final meeting of the year.

US Economic Calendar

Chicago PMI, Monday, 31st OctoberS&P Manufacturing PMI: Tuesday, 1st NovemberISM Manufacturing Index: Tuesday, 1st NovemberJob openings and Quits Data: Tuesday, 1st NovemberADP employment report: Wednesday, 2nd NovemberFOMC Announcement: Wednesday, 2nd November

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