Investors Barely Flinch at Consumption Data, But They Might at a Shutdown ...
Let's game out potential scenarios as a government shutdown looms and September data begins.
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Stocks are moving higher following the receipt of the August personal income & spending data as well as the month’s personal consumption expenditure price Index. The nutshell takeaway is consumers continued to spend in August, and inflation pressures measured by the core PCE price index didn’t surprise to the upside. Rather, the core PCE price index held steady at 2.9% on a year-over-year basis for the second month and did the same on a sequential basis at 0.2%. Looking back, that’s the fourth 0.2% sequential figure for the data set over the last five months.
When we examine the monthly core PCE data on a larger time frame using a three-month moving average, the analysis shows the annualized figures continued to tick up in August. That matches what a similar analysis revealed with the monthly core CPI figures. But again, the August data in and of itself did not surprise to the upside, and in the current environment, the market is taking that as a positive.
We’re also seeing the net effect of economic data released this week lift the Atlanta Fed’s rolling GDP forecast, better known to us as the GDPNow model, to 3.9% for the current quarter. Last week, that model pegged GDP at 3.3%. We’ll want to see what the New York Fed’s Nowcasting model has to say when it is updated later today, but odds are it is going to show an economy that, at a minimum, remains on firm footing with businesses and consumers spending.
As we look to next week, we should start to get September data. We say should because some of those data points, like the September Employment Report, will hinge on whether we have a government shutdown… or not. As of this morning, Polymarket shows a 69% chance we have a government shutdown next week. There are several days to go until the Sept. 30 deadline, and we will keep you abreast of meaningful developments. In the recent past, a short-term shutdown has been minor, but a protracted one could have greater implications for the economy and the market.
If we do get a government shutdown, because we have a Fed policy meeting that concludes on Oct. 29, we would expect the market to lean that much further in the September data that is published. That includes next week’s September PMI reports from ISM and September jobs data from the likes of ADP and Challenger Grey. Indications are we could see more mass firings via a reduction-in-force mechanism in the event of a government shutdown. If that were to happen, given the Fed’s greater focus on the employment market these days, that would likely increase the odds of two Fed rate cuts to come this year.
Continuing to game things out, if we avert a government shutdown and the data we get next week shows a sharp rebound in the number of jobs created in September and inflation pressures remain, that could present a Lucy-Charlie Brown football moment for the market for rate cut expectations. We'll be keeping watch on the data, so stay tuned.
At the time of publication, the Pro Portfolio had no position in any security mentioned.
