August payroll employment jumped 162,000, a sharp reversal from July's decline, while the August unemployment rate held steady at 4.1%. Those numbers reinforce our view that the labor market remains solid, so the Fed has little reason to delay a rate hike. The federal funds futures market now prices a 59% chance of a hike at the September 15-16 FOMC meeting, up from roughly 50/50 before the employment report, with room to move either way once fresh data lands.
This week, attention turns to inflation, with August's PPI (Thu) and CPI (Fri) coming out. Overseas, China's CPI and PPI (Wed) and the European Central Bank's (ECB) meeting (Thu) top the international agenda. We will also see earnings reports from Oracle and Adobe (Thu).
Here's more:
(1) Inflation. The Cleveland Fed Inflation Nowcasting model projects August CPI (Fri) rose 0.36% m/m and 3.38% y/y, unchanged from July's 3.4% (chart). The model's core CPI projection eases to 0.20% m/m and 2.38% y/y, down from 2.5% in July. A mild print this week could pull the odds of a September Fed rate hike back down. An upside surprise would practically guarantee a majority vote to hike at the FOMC's September 15-16 meeting.
Rising high-tech component costs continue working through the pipeline. PPI Electronic Components & Accessories is up 28.0% y/y, outpacing CPI Computer Software & Accessories, up 21.2% (chart). The gap suggests plenty of upstream pressure still has room to work through to the consumer level. Record diesel fuel prices are also putting upward pressure on inflation.
Headline PPI Final Demand cooled to 4.7% y/y in July from 5.5% in June (chart). The underlying trend remains sticky, though. The measure excluding trade services was 5.2%, and the core PPI came in at 4.7%.
(2) Unemployment Claims. Initial claims was 206,000 for the week ending August 28, with the four-week average at 207,300 (chart). That's consistent with Friday's employment report, which showed the unemployment rate holding at 4.1% in August alongside broad-based job growth, with no signs of rising layoffs.
(3) Global. The ECB meets Thursday, with markets treating a hike to 2.50% from 2.25% as a virtual certainty (chart). More interesting will be what ECB President Christine Lagarde signals for October’s meeting; the odds of a follow-up hike then sit at just 31.5%.
China's PPI climbed to 3.5% y/y in July, its firmest reading in years, driven by mining and raw materials prices (up 16.4% and 6.1% y/y, respectively) amid global commodity price pressures (chart). The CPI has barely moved, at 0.5%, so the reflation so far looks like a factory-gate story rather than a consumer one. August's data (Wed) are expected to show a small pickup in both measures.
