September jobs report: "When the risks are two-sided, you're in good position"

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Alexa Hanelin: Welcome to JP Morgan's Making Sense. I'm Alexa Hanelin on the US rate sales team here. And today I'm joined by Mike Feroli, our chief US economist, to talk about his takeaways from today's job report, as well as the path ahead for the economy and for the Fed. Today we saw a headline missed, but there's much more to the data that meets the eye. Mike, thanks for joining us.

Mike Feroli: Thanks for having me.

Alexa Hanelin: So let's start with the employment report from this morning. Give us your first read on the report. What stands out to you?

Mike Feroli: Yeah, so I think if you just look at the two major numbers, the 29,000 job growth and the increase in the unemployment rate, you might say this is a bad report, but I think when you look at the details, it's actually not that bad. Clearly we're not accelerating. This isn't a booming job market or at least in September, but it wasn't that bad, right? So three month average job growth is now around 50,000, which is probably right around trend job growth given slower labor supply. The unemployment rate increased three basis points. It barely rounded up to 4.2%. And a lot of that occurred on the back of a big increase in participation, bringing an influx of new labor force participants. So overall, it was a little softer, but it wasn't certainly anything that gets us too worried.

Alexa Hanelin: Was there anything notable under the hood in terms of the composition of job growth?

Mike Feroli: Not too surprising. There was some softness in government. We continue to see job gains in healthcare slow, but there weren't really big surprises to the upside or downside when you looked at the industrial composition of job growth last month.

Alexa Hanelin: Yeah. So we're still in this low higher, low fire space for the labor market. Let's talk a bit about the consumer. You've written about this quite a bit with your team. Consumer confidence looks depressed if you look at the surveys, but then spending numbers and consumption are strong. How do you reconcile these two cross currents?

Mike Feroli: You know, this has been really a puzzle for a lot of this expansion, which is consumer confidence and sentiment measures have been near recession levels and yet we continue to have pretty decent gains in spending. There is some speculation that changes in the survey methodology along with more politically polarized responding behavior has also kind of polluted the message that we get from these surveys. So overall, we're not putting perhaps as much weight as we used to historically in terms of thinking about forward looking implications for consumer spending.

Alexa Hanelin: And are we thinking differently on the savings rate and whether that draw down and savings rate is reflective of the wealth effect or a crunch for the consumer?

Mike Feroli: Yeah. So one of the better pieces of news we got this week was there was a decent upward revision to the saving rate. That being said, the trajectory is still pointing downward. We believe that most of that is likely due to the wealth effect, right? Stock market is booming, has been booming at least, and that allows people to need to put aside less to prepare for future needs. So we think that's probably a big part of the decline. That being said, there may also be, given the increase in food and energy prices this year, that probably has also squeezed some lower end consumers and that also has probably contributed to the lower saving rate.

Alexa Hanelin: Yeah. It's a very interesting point, sort of a shift in what we're hearing from sentiments versus what's actually been going through in the data. How about we touch on some Fed speak that we got this week? We heard from Jefferson and Williams, the Trica, two of the three. When you put their comments together, what was the common message?

Mike Feroli: Yeah. So both Williams and Jefferson basically said there's no urgency. We're still focused on inflation, but having just acted in September, there's really no urgency to act again soon. They can take their time in assessing the trends, which to I think most people's ears clearly sounded like they were pushing back against a hike at the end of this month. It doesn't mean, I don't think that we're out of the woods when it comes to further rate hikes, but I just think they want to take their time a little bit here. And perhaps the center of the committee got a little surprised by the market really running away with placing heavy odds on October when they didn't think that was appropriate.

Alexa Hanelin: And our call is still...

Mike Feroli: Yeah. We're still looking for one more in December. That's right.

Alexa Hanelin: Thanks, Mike. And we know the Fed has been hypervigilant on their inflation side of the mandate. Can we talk a bit about what we're expecting for October CPI coming in a couple weeks?

Mike Feroli: Yeah. So I think first of all, it's worth noting that this week we had the PCE reading, which came in a little soft, but the revisions, we knew these revisions were coming, but they were larger than expected. So we were thinking we and Fed officials were thinking core PCE would come in around 3.2% on a year ago basis, maybe 3.3, instead it came in 3.0. So that was some favorable news to start the week or the middle of the week, I should say. Looking ahead to the September CPI, which we'll get in a week and a half, I don't think October is off the table, but I think the remarks we heard this week from Fed officials probably raised the bar in terms of how bad that CPI report has to be to get October back on the table.

Alexa Hanelin: And something notable we've been hearing from our clients as we navigate through this market is, does the pace of hikes change where terminal ends up being? Does a deliverance of an October hike, which is not our base case, does that make it so the ultimate hike cycle will be smaller?

Mike Feroli: So in principle, I don't think those two should be connected, but in reality, I think if they were to go in October, that would signal, I think, a real single-minded focus on inflation such that you probably also want to think they were going to have a higher terminal rate. So I do think the pace probably tells you something about how much they're willing to balance employment and inflation, thinking about the path going forward.

Alexa Hanelin: Thanks, Mike. Let's talk a bit about just the broader U.S. economy. It's been showing exceptional growth. How much of the impulse do you think is underlying demand driven versus some of the AI investment, fiscal policy, the other sort of cross currents in play that are less about the actual strength of the economy?

Mike Feroli: So fiscal policy was probably more of a contribution in the first half of the year, when we were getting some of the benefits of some of the tax cuts and refunds and so forth. That's likely fading now. We continue to see very strong investment numbers. A lot of that is in imported goods. Nonetheless, AI is probably also contributing to the demand picture through something we just mentioned, which is the wealth effect, right? A lot of the gains in equity markets are related to AI stocks, of course. So I think certainly the AI is certainly a big driver right now in terms of both investment and consumption probably to aggregate demand growth.

Alexa Hanelin: I know it's a tricky question to ask an economist to comment on the rate market, but we've seen quite a volatile string of sessions and over the last quarter we sold off a hundred basis points in the front end. So from an economist perspective, what do you think has been the dominant driver of this rate repricing? Do you think it's monetary policy driven, stronger growth? Do you think it's fiscal? How are you sort of reconciling this market?

Mike Feroli: Yeah, so certainly the growth picture is supportive of higher rates, but we're also having fiscal news that probably isn't supportive, right? Not only in the U.S., but globally there's growing concerns about fiscal sustainability. So I think it's all kind of coming together and pushing things in the same direction. I think the only disagreement is going to be how you divide those things up, but qualitatively, I think they're all really contributing here.

Alexa Hanelin: Yeah, thanks, Mike. What about the midterms coming up? As we approach the midterms, how important could fiscal expectations become for treasury yields and the broader Fed outlook?

Mike Feroli: I think from a macroeconomic perspective, I actually don't think the midterms are going to be all that consequential. I think it looks very likely that you're going to have a Democratic House. In that case, no matter what happens in the Senate, you're going to have basically gridlock when it comes to fiscal policy. You could increase risks of shutdowns and things like that. It's also not a huge macro story. It's a little bit more of a nuisance in terms of the data flow and all that. We're obviously watching the elections pretty closely, but I think the implications are going to be more at a micro level than at a macro level.

Alexa Hanelin: Thanks, Mike. Last question for you. What risk do you think the market is underpricing right now? Is it overheating of the economy? Is it some inflation spike? What is the biggest risk to your view?

Mike Feroli: Yeah. I would say to our Fed call, I feel like the risks are actually pretty two-sided now. We have two inflation reports between now and the December meeting. It's certainly possible that those could come in soft, in which case they can be on an extended hold here. In the other direction though, a lot of tailor rules, things like that would say the Fed has to go probably more than once. So I think there's also a risk that it could extend this on into 27. So right now I think when the risks are two-sided, I think you're in good position. So I think that's where we are right now.

Alexa Hanelin: Thanks, Mike, for your insights. We look forward to the next data print to hear more from you, and thanks for joining us.

Mike Feroli: Thanks for having me.

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