Image from CME Fedwatch, annotations by Mish.

Market Expectation for September

• There is currently a 43.5 percent chance of a 50 basis point cut in September.
• The odds were 53.0 percent yesterday and 69.0 percent a week ago.

Stage Set Silliness

The Wall Street Journal reports Cooling July Inflation Sets Stage for Fed’s September Rate Cut

I find that headline somewhere between useless and laughable, but more toward the latter.

A month ago, the odds of at least a quarter-point cut were 90.3 percent. That’s when the stage was set.

The question now is not whether the stage is set, but for how much.

Six-Point Case for 50 Basis Points

1. Major Hurdle: We cleared a major hurdle today, despite the odds going the other way. Year-over-year the CPI dipped to 2.9 percent. That’s the first sub 3.0 percent reading since 2.6 percent in March of 2021.
2. Fed Bias: At the last FOMC meeting, the Fed has changed its bias from inflation to balanced. That means it is treating unemployment and inflation equally. Inflation has risen 0.7 percentage points from the low.
3. Recession: The odds of recession are high and rising. Few economists see this yet.
4. Next CPI Report: There is another CPI report between now and the next Fed meeting. The next FOMC meeting is September 18. The next CPI report is on September 11. I am confident of a very good report, especially year-over-year.
5. Last Jobs Report and Next Jobs Report: The next jobs report is September 6, ahead of the FOMC meeting. There is no reason to expect a good report but gaming monthly jobs reports is such a crapshoot that I don’t try.
6. Negative Jobs Revisions: Major negative jobs revisions are coming this month. In contrast to the monthly jobs reports, I am very confident of this.

1: Major Hurdle

August 14: Consumer Price Index a Tad Better than Expected Year-Over-Year

The consensus estimate for year-over-year CPI was unchanged. I accurately called for a 0.1 percent drop but was high by 0.1 percent month-over-month.

2: Fed Bias

July 31: Fed is Attentive to the Risks to Both Sides of its Dual Mandate

The Fed is concerned about inflation and jobs. It’s the latter that will be the bigger problem in the near-term. The Fed is behind the curve in jobs.

3: Recession

August 2: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered

August 9: Recession Debate: Citing the Sahm Rule, WSJ’s Greg Ip Says No Recession

Few see this but I am increasingly confident. I will have an update later this week on why.

4: Next CPI Report

August 13: Ahead of today’s report I commented Expect Good to Very Good CPI Reports for July, August, and September

Year-Over-Year Look Ahead

• July: 2.9 percent
• August: 2.4 percent
• September: 2.1 percent

At the risk of looking silly, I suggest any surprises for those numbers to be to the downside.

Of July, August, and September, I was least confident of today’s number.

I am now confident of at least a further 0.3 percentage point decline in the year-over-year CPI report for August.

However, my predicted 0.5 percentage point decline may be a bit much.

5: Next Jobs Report and Last Job Report

These monthly reports are garbage, so who the hell knows about the next report. I won’t bother guessing. It’s a total crap shoot.

The monthly reports are garbage because they are based off a sampling of under 700,000 establishments, using a flawed birth-death model, vs the QCEW sampling of 11.9 million establishments.

The Current Employment Statists (CES) sample survey was 666,000 individual worksites in 2023. CES is the monthly nonfarm payrolls report.

666,000 / 9.2 million is 7.2 percent of the data. The BLS uses broken models to estimate the rest.

Heading into recessions the BLS overestimates jobs, and coming out of recessions the BLS underestimates them.

In addition, Covid wreaked havoc with the models.

August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions

The headline jobs number was much weaker than the consensus estimate of 180,000 and the unemployment rate rose 0.2 percentage points.

July 31: Small Business Employment Growth Is Now Negative (and What It Means)

ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49. Trends are negative in all but very large corporations.

Corporations sized 20-49 provide nearly as many jobs as large corporations with 500+ employees. Small corporations are now shedding workers.

Large corporations will not be immune.

August 1: Intel Announces 15,000 Job Cuts, 15 Percent of its Workforce

Intel received $8.5 billion in Biden administration grants (Inflation Reduction Act) but announces massive layoffs and halts dividends due to a decline in revenue.

By the way, it was that last jobs report that sent rate cut odds soaring. I called for 50 basis points in advance of the jobs report.

6: Negative Jobs Revisions

July 26: Expect the BLS to Revise Job Growth Down by 730,000 in 2023, More This Year

At the heart of these revisions is a horribly flawed birth-death model used by the BLS. My calculation closely matches an estimate by Bloomberg’s chief economist [Anna Wong].

The link above discusses the Business Employment Dynamics (BED) report based on a huge 11.2 million subset of the QCEW report.

I estimated a negative revision of 779,000 jobs in advance of learning Anna Wong’s estimate.

People pay attention to the CES because it is timely. The much more accurate QCEW and BED reports lag by about seven months.

Closing Thoughts

I do not believe the Fed should have a dual mandate and I believe inflation is historically understated by excluding actual home prices.

I am commenting on what I believe the Fed will do with what I expect the data to be.

That’s the case for a 50 basis point cut. If what I suggest happens, does happen, I will agree with the decision based on a dual mandate.

However, I do not think there should be a Fed at all. The market would do a better job.

The Fed is constantly creating boom-bust cycles then chasing its own tail (and tales) to fix mistakes it made.

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