Gov Shutdown More "Noise" to Us and could Put Fed on a "Structural Pause." We Think PCE Friday Will Confirm Inflation on a "Glidepath Lower." Array ( [cookie] => 93d9d8-e26ec9-e9cd59-e288fa-bd6e80 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

HEADS UP: Tom will be back on Monday to publish the First Words/Macro Minutes.

We discuss: The recent GDP release, our PCE estimates for Friday, and what a Government Shutdown could mean for the stock market.

Please click below to view today’s Macro Minute (Duration: 7:41).

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The most important data point over the past two days was Q2 GDP which came in at 2.1% vs 2.2% (expected). This lower than expected report partially caused a risk-on rally with the S&P 500 ending Thursday +0.59%. Still, markets are nervous about looming headline risks, notably a potential Government Shutdown over the next few weeks. Even though equities rallied the past two days, equity put/call ratio surged to 1.41 Wednesday, underscoring the “nervousness” in markets. Forward 1M/3M returns are strong when such readings have occurred since 1995, so we see this as more constructive to markets than alarming. Still, the most important factor for markets in the coming months arguably will be the trajectory of inflation, and we get key August PCE data Friday at 8:30 AM. We outline our expectations for the release and commentary about a potential US Government shutdown below.

• PCE data released Friday will be important for markets and we think will support our thesis that inflation remains on a glidepath lower. Our forecast is outlined below:
  – Headline YoY of 3.41% vs 3.50% (consensus) <– Soft
  – Headline MoM of 0.39% vs 0.50% (consensus) <– Soft
  – Core YoY of 3.82% vs 3.90% (consensus) <– Soft
  – Core MoM of 0.14% vs 0.20% (consensus) <– Soft
  – And although many cite the rise in headline (due to rise in gasoline) as a reason to be “wary” about the PCE release, Chair Powell himself admitted that the short-term volatility of gasoline will not influence the Fed’s actions.
  – So we don’t see this slight rise in headline as a reason to call for more hikes. So not really “thesis-changing” to us.
  – Additionally, quarterly Core PCE was revised higher in 2021 and 2022. To us, it shows 2 points: i) inflation in 2021 and 2022 were higher than realized; ii) higher “base” value also means the PCE year over year could be lower later this year.
• The 3rd estimate of 2Q2023 GDP was released today at 2.1% (slightly cool vs 2.2% expected). Digging into the details further:
  – Personal Consumption Expenditure was revised down, but partially offset by the upward revision in the domestic Investment
  – Nonresidential has been the biggest contributor within Domestic Investment
  – Manufacturing Structure investment grew at 190.4% and 86.5% annualized QoQ in 1Q2023 and 2Q2023, respectively.
  – Based on its weight within the economy, about 1/4 of the economic growth was from this category in the last 2 quarters
• But markets are still nervous for valid reasons, most notably the potential of a Government Shutdown. So we looked at all government shutdowns under various political regimes since 1960 (N=20) to measure the market impact.
  – Of the 20 government shutdowns since 1960
  – The average shutdown lasted 9 days
  – And markets on average were “flat”
  – 1M post shutdowns, markets on average were actually higher by 1.2%
  – The 1M median performance is even higher (by 1.3%)
  – So it turns out, shutdowns historically are less “market-altering” than most believe
  – Still, it is possible markets are more “hyper-reactive” to a potential shutdown in October as sentiment is already weak.
• We were curious about the implications a government shutdown would have on the BLS, so we called them to find out. Here are the conclusions:
  – The BLS would suspend data collection, processing, and dissemination
  – Once funding is restored, the BLS would resume normal operations and notify the public of changes to the economic releases
  – So a pretty big deal for the BLS in our view
• In the event of a shutdown, regarding Fed policy, would it make sense for the Fed to make a policy decision without complete data? Wouldn’t that go against their promise of “data dependence?” So in some ways, a government shutdown might actually automatically put the Fed on a “structural pause.”
• This has all created market uncertainty/jitters which can be seen in the intraday equity put/call ratio surging to 1.41 Wednesday
  – This is a top decile move since 1995
  – This underscores the fear in markets as of late
  – But looking forward, markets tend to perform strong
  – Forward 1M: 1.7%; Win Ratio: 68%
  – Forward 3M: 4.0%; Win Ratio: 75%
  – So constructive to us
  

BOTTOM LINE: Friday will be the most important day of the week in terms of eco data, and we see PCE coming in softer than expected.

Our view is that this report will confirm to us that inflation remains on a glidepath lower. This remains the most important variable for the FOMC regarding forward monetary policy decisions. And while headline risks do loom, especially the potential of a government shutdown, the historical market impact is not as strong as many likely believe. Furthermore, in the event of a Government Shutdown, the BLS confirmed to us that they would not be able to produce their typical economic reports. This will structurally put the Fed on “Pause mode” assuming they keep their promise of “data dependence.”

Key incoming data September

•  9/1 8:30am ET August Jobs Report Tame
•  9/1 10am ET August ISM Manufacturing Tame
•  9/6 10am ET August ISM Services Mixed
•  9/6 2pm ET Fed releases Beige Book Tame
•  9/8 9am ET Manheim Used Vehicle Index August Final Tame
•  9/8 2Q23 Fed Flow of Funds Report Tame
•   9/13 8:30am ET August CPI Mixed
•  9/14 8:30am ET August PPI Tame
•  9/15 8:30am ET September Empire Manufacturing Survey Tame
•  9/15 10am ET U. Mich. September prelim 1-yr inflation Tame
•  9/18 8:30am ET September New York Fed Business Activity Survey Tame
•  9/18 10am ET September NAHB Housing Market Index Tame
•  9/19 9am ET Manheim September Mid-Month Used Vehicle Value Index Mixed
•  9/20 2pm ET September FOMC rates decision Market saw Hawkish
•  9/21 8:30am ET September Philly Fed Business Outlook Survey Mixed
•  9/22 9:45am ET S&P Global PMI September Prelim Tame
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity SurveyTame
•  9/26 9am ET July S&P CoreLogic CS home price Hot
•  9/26 10am ET September Conference Board Consumer ConfidenceMixed
• 9/29 8:30am ET: August PCE
• 9/29 10:00am ET: Sep F UMich Sentiment and Inflation expectation

Key incoming data August

• 8/1 10am ET July ISM Manufacturing Tame
• 8/1 10am ET JOLTS Job Openings Jun Tame
• 8/2 8:15am ADP National Employment Report Hot
• 8/3 10am ET July ISM Services Tame
• 8/4 8:30am ET July Jobs report Tame
• 8/7 11am ET Manheim Used Vehicle Index July Final Tame
• 8/10 8:30am ET July CPI Tame
• 8/11 8:30am ET July PPI Tame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker July Tame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
• 8/29 9am ET June S&P CoreLogic CS home price Tame
• 8/29 10am ET Aug Conference Board Consumer Confidence Tame
• 8/29 10 am ET Jul JOLTS Tame
• 8/31 8:30am ET July PCE Tame

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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