US equities (^GSPC, ^DJI, ^IXIC) are rising Thursday morning after economic data in the form of US jobless claims came out lower than expected (233,000 reported vs. 240,000 expected), inspiring some new confidence in Wall Street's outlook on the economy.
As more data pours in, is there enough to cement an interest rate cut from the Federal Reserve and what could that first cut look like for the economy?
Stifel chief economist and managing director Lindsey Piegza joins Morning Brief to give insight into the current labor market trends and the mindset behind a Fed decision to cut.
Piegza comments that for the Fed to cut rates: "It's going to come down to whether or not the Fed gets that needed confidence to justify a rate reduction near term. But right now, looking at that July statement, it's clear the Fed is not at that point. The Fed does not have confidence that we are on a sustainable disinflationary trend."
She continues to state "the onus is on the data to convince policymakers not to cut rates."
jobless claims coming in just lower than expected is offering some relief to the market. You can see that playing out on the screen right now. You've got the Nasdaq futures up just around 1.2% here ahead of the open. We want to bring in Lindsey Piegza. She's Stifel's chief economist and managing director. Lindsay, it's good to see. So let's focus on the economic side of things obviously. When you take a look at this print maybe offering some relief, especially on the heels of what we saw last Friday, what's your first take?
Well, I think it's a relatively solid number and it offers an indication of still positive conditions in the labor market, helping to offset some of that rising concern that circulated through investors and the marketplace in the aftermath of a less than solid July employment report. Now, that being said, even when we look at what we saw in terms of the non-farm payrolls report last month, we're still talking about relatively positive job creation. Now, there's no doubt that conditions in the labor market have cooled from earlier peak levels. But this morning's report suggests that that may be more of a normalization in terms of conditions as opposed to an indication of outright weakness lurking around the corner.
Okay. And so around the corner from here, we're also waiting to see what type of steepness we get to a Fed cut and what that policy going forward looks like. What are you anticipating?
Well, it's going to come down to the inflation numbers. It's going to come down to whether or not the Fed gets that needed confidence to justify a rate reduction near term. But right now, looking at that July statement, it's clear the Fed is not at that point. The Fed does not have confidence that we are on a sustainable disinflationary trend. So the next several inflation data points are going to be key. But it does appear as if the onus is on the data not to convince policymakers not to cut rates. So meaning if we did see a minimal 1/10th of a percentage point decline in some of these key price metrics, I think that may be enough to justify the Fed to move in September at a very tempered 25 basis point clip. But even so, if it takes just one data point to get that confidence, I don't see the Fed acting aggressively going forward, meaning it's likely that we see a very slow controlled pace of reductions, keeping the level of Fed funds well above neutral out beyond 2025.
Lindsay, we've been talking to a number of economists, really over the last several weeks, but in particular this week and some have been very critical of the Fed saying that they should have cut at the last meeting, that some of the data points that we've gotten here most recently, once again, prove maybe that the Fed is behind the eight ball on this. What do you think?
I don't think the Fed is behind the curve at all. I think the data has improved, but when we look at inflation, we saw several months of head fakes at the start of the year throughout the first quarter. And with April little changed, June and July are really the only data points that the Fed has as of late to suggest we're back on a downward trend in terms of price pressures. And two data points fall short of the Fed's threshold of many data points needed to instill that level of confidence to justify a policy change. So, no, I don't think the Fed is behind the curve. The Fed is beholden to that threshold that they set of many good months. They're waiting for the data and if the data cooperates, if the data comes in under expectations or as expected in terms of improvement, they will continue to move forward. If it doesn't, the Fed is willing to remain on hold beyond investors' expectations.
How much further fallout do you think that means for the labor market?
Well, the labor market again is still very solid. When we look at the average pace of 2024, we're still talking about creating over 200,000 jobs on a monthly basis. And yes, the unemployment rate has ticked up as of late, but at 4.2%, we're still well below the Fed's lower bound of what they designate as the full employment range. Wages are still solid up nearer 4%. And so we're still talking about again labor demand outpacing labor supply, perpetuating tight ish conditions, slightly less tight, but still tight ish. So the labor market is still faring very well, providing support to the economy, the consumer and making it difficult for the Fed to justify a more aggressive move to the downside in terms of rate cuts.
Lindsey Piegza, who is the Stifel chief economist and managing director. Lindsay, great to see you. Thanks so much for taking the time.
Thanks.
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"So meaning if we did see a minimal one tenth of a percentage point decline in some of these key price metrics, I think that may be enough to justify the Fed to move in September at a very tempered 25 basis point clip," Piegza.
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This post was written by Nicholas Jacobino