On Thursday, Fed Chairman Kevin Warsh was, as they say, on the horns of a dilemma. Should he continue to talk tough on inflation at the Jackson Hole conflab on August 27th, possibly signaling a rate hike in September, or talk about AI and productivity fairies leading to a much more dovish outcome? Maybe both? Or, as seems to be his inclination, say nothing meaningful at all?
Well, by Friday morning his job got a whole lot easier. Hiring rolled over in July, and prior months were marked down rather significantly. 
This isn’t an ‘end of the world’ recessionary report by any stretch, but a contraction is a contraction, and it gives Warsh an out when talking about policy for at least a couple months.
Why didn’t the market interpret this as a dire shot across the bow? Well, as in all payroll reports, there’s a lot of noise. For example, private-sector hiring was +30,000 in July – losses were centered in public education. But this isn’t to say private-sector hiring was booming by any stretch, as you can see below.
Also letting Warsh off the hook is the fact that payroll growth slowed again in July, hitting the lowest level since 2017. 
For the equity markets in particular, this was a goldilocks type report. The modest contraction in hiring combined with slower payroll growth means the Fed can take a wait-and-see approach. But underneath the surface it’s pretty clear the wheels aren’t coming off the economy. As Ed Yardeni noted on Friday: “The decline in jobless claims is corroborated by layoff announcements. US employers announced just 33,429 job cuts in July, the lowest monthly total in two years.”
The market has a rate hike at the September meeting as basically a coin flip.
Next week we get a new CPI report, and even if it comes in hot, the committee is going to be torn between their dual mandate, which means there’s a non-negligible chance they choose to punt on doing anything until (probably) after the mid-terms. Time will tell, but Warsh’s comments at Jackson Hole in a few weeks are probably going to be more important than whatever economic data we have between now and then.
He’s going to talk about his task forces, isn’t he?
(Other) Charts We Found Interesting
- Warsh might also talk about what’s an appropriate inflation measure to target. The chart below from PIMCO shows an assortment of different methodologies. For years now, the Fed has targeted the Core PCE measure (red line), which has coincidentally been the lowest measure of inflation (surprise surprise!!). But the script has changed recently, and other measures are now coming in below Core PCE. Time to change the yardstick?
- What’s the counterpoint to the idea of no hike at the September meeting? How about third quarter GDP growth tracking at over 6%!!!
- Earnings season is getting close to being over, and the percentage of S&P 500 companies beating expectations hit unprecedented levels.
- From Paul Kedrosky – “U.S. adding more grid power storage every month than the annual total before 2022.”
- The yields on Treasury Inflation Protected Securities (TIPS) of various maturities are bouncing around multi-year highs.
- There’s nothing magical about there being over 65’s than under 18’s, but it is symbolic of global trends.
Have a good weekend
Charles Blankley
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