Employment data points to a still robust US labor market, supporting higher for longer narrative

Employment data points to a still robust US labor market, supporting higher for longer narrative

Non-farm payrolls surprised dramatically to the upside for September, but wage gains are fading

• USD: Markets and economists had been anticipating a deceleration of employment from the previously reported 187K in August, instead the actual figure was nearly double the consensus estimate at 336K, with substantial positive revisions to July and August totaling 119K meaning the three-month moving average is now 266k. Private employment growth increased a robust 263K and government employment added 73K. In the private sector, the strength was predominantly still in the service industry with 96K jobs added in leisure and hospitality and another robust 66K jobs added in private health care.
   
• USD: On the other hand, hourly earnings gains are quickly moving back to pre-pandemic norms. Hours worked declined slightly over the year, likely reflecting the shift towards the service sector where hours tend to be shorter, but it coupled with the wage data to show that the rapid gains in worker nominal earnings are fading quickly, increasing the safety from a wage price spiral situation. Even the strong employment gain was not enough to drive an acceleration in aggregate weekly payrolls, which slowed to 5.6% year-to-year from 9.3% the year prior. So while employment is still very strong, the wage gains are fading rapidly even without mass layoffs.

Evidence of labor market strength can also be seen in JOLTS jobs openings, ISM PMI employment subindex, and initial claims

• USD: US JOLTS openings for August rose to 9.6 million. This reading followed 8.9 million (revised from 8.8 million) openings in July and surpassed the market expectation of 8.8 million. Over the month, the number of hires and total separations changed little at 5.9 million and 5.7 million, respectively. Within separations, quits (3.6 million) and layoffs and discharges (1.7 million) changed little. The quits rate was unchanged at 2.3% in August, a level in line with typical pre-pandemic levels and well off the highs of around 3% in 2021/22.
   
• USD: ISM Services PMI registered 53.6 percent in September, 0.9 percentage point lower than August’s reading of 54.5. The Prices Index registered 58.9 percent in September, matching its August reading. The employment index fell to 53.4 from 54.7. ISM manufacturing PMI surprised to the upside in September increasing to 49.0 in September from 47.6 in August. Almost all key subcomponents increased, with the employment index increased for the second month in a row to 51.2 from 48.5.
   
• USD: Initial jobless claims increased only modestly to 207k from 205k during the week of September 30th, closely in line with expectations. The 4-week moving average declined by 2.5k. Continuing jobless claims declined to 1664k from 1665k during the week of September 23rd, close to expectations. The 4-week moving average declined by 5k.

Strong Canadian employment data suggests potentially one more rate hike and CAD resilience in the medium term

Strong employment and wage growth could lead to more rate hike

• CAD: Canada’s employment rose by 63.8k jobs in September, surpassing consensus expectations at 20k and Citi’s high forecast at 55k. Full time employment rose by 15.8k jobs while part time employment rose by 47.9k. Goods sectors lost 10.5k jobs while services sectors added 74.3k jobs. The unemployment rate remained at 5.5% in September with the participation rate ticking up slightly to 65.6%. Average hourly wages of permanent employees rose 5.3%YoY, up from 5.2% in August. Not only has wage growth stayed above the 4-5% range the BoC has continually cited as too-strong to be consistent with 2% inflation, wage picked up somewhat further in September.
   
• CAD: Recently, the trend of aggregate hours worked in employment data has outpaced output growth. This could suggest either a pick up in activity in Q3 or very weak productivity. Both would be somewhat concerning for the BoC assessing upside risks to inflation. Weak productivity would suggest increased wage costs will be passed through to higher prices.
   
• CAD: Strong employment in September was partly due to seasonal adjustment issues. Similar patterns to 2022 data have repeated this year, with weaker employment over the summer months which then rebounds into the fall. This is particularly evident in education employment, which has dropped in August the last two years and bounced-back in September. Employment in the education sector accounted for the majority of the job growth in September with 65.8k jobs added.
   
• CAD: The rise in the unemployment rate from 5.0% earlier this year to 5.5% currently has been the clearest sign of a loosening labor market recently, although this looks to have possibly stalled. Strong immigration has likely been a factor in some loosening, but can keep monthly employment figures strong. Most importantly, wage growth is not consistent with a loosening labor market and could have the BoC adjusting policy again sooner rather than later.

Week Ahead: US CPI MoM, PPI Final Demand MoM, U of Mich Sentiment, ECB Minutes, Euro Area Households Inflations Expectations, UK GDP and KPMG RECs survey August GDP Data, China September CPI, Exports, Total Social Financing

US: CPI, PPI, UMichigan Sentiment

• USD: CPI MoM – Citi: 0.3%, median: 0.3%, prior: 0.6%; CPI YoY – Citi: 3.6%, median: 3.6%, prior: 3.7%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 4.1%, median: 4.1%, prior: 4.3%; Core CPI should rise 0.32%MoM in September, a strong increase that rounds to 0.3% but with risks of a print that rounds to 0.4%. One notable difference in our forecast compared to August data is a pick-up in shelter prices. Citi Research expect primary rents to slow somewhat to 0.44% from 0.48% in August but owners’ equivalent rent to pick up to 0.41% from 0.38%. The risk is that these shelter prices continue slowing, as they still should ease further over the coming months. But the stronger element of shelter prices in September should be a sharp rebound in hotel prices, with a 3.5% increase in lodging away from home incorporated in our forecasts and with upside risks. Hotel prices typically fall by around 3% in September in non-seasonally adjusted terms, but weekly data instead revealed a slight increase on average this year. This implies a large seasonally adjusted jump in this component, with upside risks, after a few months of declines. Other travel services prices should also be strong, with a 4% increase in airfares as jet fuel prices rise and demand for domestic travel could increase into the holiday season. Overall, Citi Research expect a strong 0.45%MoM increase in core services prices excluding shelter, which would be even stronger including hotel prices (a more comparable measure to core PCE services excluding housing). Headline CPI should also rise a similar 0.33%MoM and 3.6%YoY. Energy prices should continue to rise, although more modestly than in August in seasonally adjusted terms. Restaurant prices will be a particularly important component of headline CPI, as these prices will be included in core PCE inflation.
   
• USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.3%, prior: 0.7%; PPI Final Demand YoY – Citi: 1.8%, median: NA, prior: 1.6%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 2.2%, median: NA, prior: 2.2%; PPI ex Food, Energy, Trade MoM – Citi: 0.3%, median: 0.2%, prior: 0.3%; PPI ex Food, Energy, Trade YoY – Citi: 3.1%, median: NA, prior: 3.0%, Citi Research expect a 0.4%MoM increase in PPI final demand, although with upside risks from rising energy prices, and a 0.3% increase in core PPI that excludes food, energy, and trade services prices. Trends in producer prices have been somewhat leading consumer prices over the last few years, both when supply chain disruptions and shortages led to rising prices and when the correction of supply issues and lower energy costs led to falling prices. Over the last few months, stronger PPI has captured rising energy prices but also the possible end of disinflationary pressure from supply chains correcting. As supply has normalized and energy prices increased, transportation and warehousing prices have risen again, and Citi Research would continue to look to PPI data for upside to goods prices.
   
• USD: U of Mich Sentiment – Citi: 66.2, median: NA, prior: 68.1; 1y Inflation Expectations – Citi: 3.4%, median: NA, prior: 3.2%; 5-10y Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.8%; While still well above the lows of last summer, consumer sentiment has been declining in the last couple of months as energy prices started rising. Citi Research expect another modest decline in the October preliminary release to 66.2 from 68.1. The most important part of the report will be inflation expectations. Citi Research were somewhat surprised by the decline in inflation expectations in September considering that energy prices remained elevated compared to most of this year. Citi Research expect a rebound in 1y inflation expectations to 3.4% from 3.2% in the October preliminary report. While this level would be well-off the highs of this year it’s still somewhat more elevated than the typical pre-pandemic expectations. Similarly, Citi Research also expect a modest increase in the 5-10y inflation expectations to 2.9% from 2.8%.

Euro area and UK: ECB minutes, euro area household inflation expectations and UK GDP and KPMG-RECs survey

• EUR: ECB minutes: the minutes of the September are likely to be staler than usual given average Euro Area 10-year sovereign yields have risen by 25bp since the September meeting. PEPP reinvestments (and likely reserve remuneration) were not discussed at the meeting according to President Lagarde, setting our focus on trust in the staff projections and the balance of risks around them.
   
• EUR: Euro Area Households Inflation expectations: Household inflation expectations, both 1-year ahead and 3-year ahead, have been correcting lower since the start of the year, but have recently stabilized at levels above pre-energy shock, probably on higher fuel prices. Citi Research expect a similar dynamic to have occurred in the August survey (when fuel prices accelerated further).
   
• GBP: UK: GDP and KPMG-RECs in focus: A busy week for the UK next week with the Labour Party conference, a raft of MPC speakers and some not unimportant data all on the agenda. In terms of data, the focus will be on the KPMG-RECs survey released on Wednesday, which Citi Research expect to show the UK labour market continuing to loosen. Second will be August GDP data – where the question is how far activity can rebound after a subdued July. Elsewhere, Credit conditions for Q3 as well as the RICS survey will be worth watching closely – with the latter likely to remain consistent with an ongoing downturn. For the MPC, attention will be focused on those comments from Bailey and Pill, with Broadbent last week casting a somewhat dovish tone.

China: CPI, PPI, trade balance, total social financing

• CNH: CPI September – Citi Forecast: 0.2%YoY, Previous: 0.1%YoY; PPI September – Citi Forecast: -2.4%YoY, Previous: -3.0%YoY. For CPI, food inflation could be less strong with pork prices almost flat. The momentum of services price could depend on the Golden Week travel boom – Citi Research are still waiting for the numbers to confirm its strength and if there is any improvement in average spending. PPI deflation could continue to narrow as indicated by the price breakdown of the Mfg PMI survey. International oil prices did help, and the NDRC also raised domestic prices in September.
   
• CNH: Exports September – Citi Forecast: -7.0%YoY, Previous: -8.8%YoY; Imports September – Citi Forecast: -5.8%YoY, Previous: -7.3%YoY; Trade Balance September (USD $Bn) - Citi Forecast: 74.0, Previous: 68.2; PMI’s new export order sub-index picked up by 1.1 ppt to 47.8 in September. The US Mfg PMI continued to rise in September, while EU’s remained stable. Global trade activities, represented by the Baltic Dry Index, saw a notable improvement in September. As a leading index, Korea’s export growth rose by around 4 ppt to -4.4% in the same month. Favorable base effects will also impact exports. The PMI’s import sub-index in September retreated, but commodities prices such as iron ore and oil have risen. Coupled with the gradual recovery in domestic demand, Citi Research expect import growth to also improve.
   
• CNH: Total Social Financing September (RMB bn) – Citi Forecast: 3200, Previous: 3124; New RMB loans (RMB bn) – Citi Forecast: 2000, Previous: 1358; M1- Citi Forecast: 2.3%YoY, Previous: 2.2%YoY; M2- Citi Forecast: 10.5%YoY, Previous: 10.6%YoY; New RMB loans could hit RMB2,000bn and new TSF could stand at RMB3,200bn with government bond issuance. The key focus should be on whether credit demand picks up following recent policy measures. For corporate, long-term loans should be a point to watch – with bottoming exports and profit improvement, the number should rise again. For households, early mortgage repayment should end with the long-waited mortgage repricing. The latest property easing may still take some time to show up in data.