Inflation May Make An Ugly Return This Week


Unemployment Report Shocks Markets

Last week’s unemployment report was shocking. During a live session for paying members, I found myself staring at the data, unable to respond, coming in at 254,000. The highest analyst estimate was 220,000, and the whisper number on Bloomberg was 152,000. What made it even odder was that both August and July figures were revised higher, along with wages.

We spent three months working under assumptions based on the data, only for everything to unravel in seconds. This makes me hesitate to shift from the “higher for longer” policy camp to the stagflation/recession camp. A 4% wage growth rate is inconsistent with 2% inflation but aligns with a 3% rate, assuming 1% productivity.


Wage Growth and Inflation

The data is inconsistent because the average workweek fell to 34.2 hours, a level not seen since the 2008 and 2020 recessions. It hit 34.2 hours three times in 2024. A drop below this level would raise concerns.

Unemployment Data 2024

(Click on image to enlarge)


Aggregate Weekly Payroll Growth

We saw the Index of Aggregate Weekly Payroll growth slow to just 4.9% year-over-year, near the lower end for this business cycle. This suggests that nominal GDP growth for this quarter may have slowed as well, as the two tend to track closely over time.

Weekly Payroll Growth

(Click on image to enlarge)

The Aggregate Weekly Payroll three-month annualized change reached about 4.4% in September, higher than June’s 3.6%. Nominal GDP growth in Q2 was 5.6%, and the Atlanta Fed’s model estimates the same for this quarter. If payroll growth is rising while GDP remains steady, this indicates higher labor costs and reduced productivity, potentially fueling inflation.


September CPI and Inflation Risks

CPI swaps seem to indicate that September inflation could exceed expectations. They are pricing in a 0.2% month-over-month increase for headline CPI and a 2.4% year-over-year increase, surpassing estimates of 0.1% month-over-month and 2.3% year-over-year. The real risk is shelter inflation, which could surge based on trends in Shiller Home Prices and a potential 12-month lag in the CPI Shelter Component.

CPI Inflation 2024

(Click on image to enlarge)


Currency Market Impact: USD/CAD and USD/CHF

A hotter-than-expected CPI would strengthen the US dollar, particularly against the Canadian dollar (USD/CAD), which has already weakened. However, unless the USD/CAD currency pair breaks through the 1.36 mark, it’s unlikely to severely impact equity markets.

(Click on image to enlarge)

The other currency to watch is the USD/CHF currency cross, which seems to have formed a diamond bottom pattern, indicating a potential return to 0.87 or 0.88. Historically, this has impacted Apple’s stock price due to the Swiss National Bank’s significant $10 billion stake in Apple (AAPL).

USDCHF Currency Chart

(Click on image to enlarge)

This movement could also affect Microsoft (MSFT) in a similar manner.

Microsoft Stock Movement

(Click on image to enlarge)


S&P 500 Technical Analysis

The S&P 500 remains in a secondary rising wedge pattern, and despite Friday’s unusual price action, this structure remains intact. Liquidity in the market is weak, and the top of the book hasn’t improved, leaving bid/ask spreads wide and gamma levels neutral. Should sellers step in, the market could be poised for a significant move downward. However, I’ve been wrong before and could be wrong again.

S&P 500 Technical Analysis

(Click on image to enlarge)


More By This Author:

A Hot CPI Report May Be A Huge Problem For An Illiquid Market
Markets Are Shocked By The Hot Job Report
Stocks Stall Out Before The September Jobs Report

Disclosure: Michael Kramer and the Clients of Mott Capital own Microsoft and Apple – Long-Term.

Charts used with the permission of Bloomberg Finance L.P. This report contains ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Or Sign in with
Anne Barry 4 weeks ago Member's comment

Who do you think will make this worse?  A Kamala or a Trump victory?