The Week Ahead – How Much is That Doggie in the Window

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

I spent part of the weekend looking for a dog to join the Dulyea household. We went to a rescue event just to look, and there were a lot of very cute pups. My younger son honed right in on an 8-week-old husky mix named Zorro, which looked like a potential match, but I was hoping for something a bit older – puppies are a lot for a first time dog owner. It was a fun event, but I felt badly leaving empty-handed.

Speaking of mixed bags, last week’s employment report was very much a tale of two cities. The headline net gain of 194,000 fell well short of expectations and was at the low end of the range of what the Federal Reserve (Fed) could tolerate and still go ahead with tapering. Keep in mind the labor market data are pivotal right now since the Fed is prioritizing the full employment part of its dual-mandate. We believe Jerome Powell and the Fed are still going forward with the plan to wind-down quantitative easing at the November meeting, with the goal of raising rates in late 2022 depending on the inflation backdrop. While the headline number was much weaker than expectations, the report clearly showed that the overall economic recovery is intact. With revisions, payroll employment increased 363,000. Also reported was an increase in the workweek, wages, and, most importantly, the unemployment rate dropped to just 4.8%.

Of course, rising wages and the wealth effect increase demand for goods. While we expect supply chain pressures to mitigate next year, it could be a challenging Christmas shopping season for retailers and consumers alike. The biggest visible risk to markets is a significant acceleration in inflation that brings on a surge in bond yields and aggressive Fed action in the form of higher interest rates. For now we are trusting that the Fed will stick with their plan of Flexible Average Inflation Targeting, which means they will allow inflation to stay above their 2% target until the labor market has normalized.

The focus this week will be on Wednesday’s Consumer Price Index (CPI) print. Driven by gasoline and food prices, the headline CPI, which has posted large increases in the past few months, likely rose 0.4% in September. This would mean inflation has risen 5.4% over the past year. The Empire Manufacturing Index and the Philadelphia Fed Survey, both leading indicators of broad economic strength, probably fell moderately but still suggest solid growth. Retail sales were probably soft since vehicle sales fell; however, ex-autos, retail sales will likely post another strong gain. Finally, the earnings season begins in earnest with 21 S&P 500 companies reporting third quarter earnings this week.

Data deck for October 11–October 15: