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Over the last two weeks, the US economy – or at least the narrative about the US economy – has entered a distinct phase.
There’s a hardening story line that the rate hiking cycle is over. The prospect of rate cuts sometime in 2024 is becoming real. People still generally expect that the US will avoid recession. If you put those plot lines together, it sounds like a soft landing. So, not surprisingly, markets have been buoyant. As of the time I’m typing this, the S&P 500 is up over 6% since its recent low in late October.
That’s the narrative and now the question is whether the data support the story. Over the next week, we’ll get plenty of numbers that speak to exactly this.
Here are a few – okay, five – things I’ll be watching for in the week ahead:
October CPIOn Tuesday, we get the October Consumer Price Index reading. The current consensus, per the Bloomberg survey, is for a headline sequential increase of just 0.1%, and for the core number to grow by 0.3%. One thing that’s kind of funny is that “core” inflation measures are often viewed with suspicion since they involve lopping off previously inflated categories like food and gasoline. Except right now we’re in a position in which gasoline prices have tumbled fast, so the core is hotter than the headline.
Oil PricesAnd that of course leads to the next question, which is whether gasoline prices can fall even further. When Hamas attacked Israel on Oct. 7, the kneejerk impulse was to assume that oil prices would rise because we’re trained to expect that rising violence in the Middle East means it’s a good time to buy oil. And oil did briefly jump after the attack. But the war doesn’t involve players in the oil industry. So far, the conflict hasn’t widened across the region in a meaningful way. Oil prices have tumbled significantly instead. Brent crude got above $92 in October; this past week it briefly dipped below $80 per barrel. Wholesale gasoline futures are near their lowest level of the year and aren’t that much higher than in early 2019.
Retail SalesYou could make the perverse argument that lower oil is inflationary due to the amount of extra cash people have in their wallets from lower prices at the pump. I’m generally skeptical of that kind of bank-shot thinking. On the other hand, we’re in a moment where there is some more concern about economic growth and the health of the US consumer. Obviously, cheaper gasoline prices are helpful to the consumer, whose spending we’ll see on Wednesday when we get October retail sales. Excluding autos and gasoline, the number is expected to rise 0.2% sequentially per the Bloomberg survey.
Jobs DataThe last big potential plot twist to watch next week is the Initial Jobless Claims number as well as the Continuing Claims data. Both are low but have been creeping up a little bit. In particular, Continuing Claims, which will be out Thursday, are near the highest level of the year already. Right now everyone’s paying attention to modest signs of weakening in the labor market for a simple reason, which is that empirically modest signs of weakening tends to turn into rapid weakening very quickly. We’ve seen the unemployment rate rise from April’s 3.4% to 3.9% in October. While the good news is that 3.9% is still very low, a half a percentage point increase is not nothing. It doesn’t necessarily mean recession, but if we are looking at the start of a recession, then history tells us that the unemployment rate would go a lot higher. So you can’t just ignore modest weakening on the grounds that it’s modest. Keep an eye on whether the Thursday claims data show more signs of softening.
Fed SpeakFinally, there’s more Fed speak next week, starting with Chicago Fed President Austan Goolsbee talking about the economy and monetary policy on Tuesday. Goolsbee has been on the dovish side of things, so he’s well aligned with the current macro narrative. Speaking of Fed speak, on Friday Atlanta Fed President Raphael Bostic said the Fed is currently well positioned to “let things happen.” In other words, they have some time and flexibility. A lot of data that will come out between now and, say, March that will help determine whether they should be cutting soon or not. There’s no obvious rush to act in either direction.
It should be an interesting week. And then next week we can do it all over again and debate whether the economic numbers tell the same story as the rest of us or rewrite it.Stay on top of the week with our bundle of the most popular newsletters, featuring analysis with the Evening Briefing, Five Things to Know: Americas and Matt Levine’s Money Stuff.
