US Watch - Data seal the hike, not the jumbo

Jobs: Strong demand, but no wage pressure yet

Payrolls rose by 165k in October, alongside an upward revision of the past two months 84k , lifting the three-month average to 137k. Hiring was broad, led by professional services, health care, transport and manufacturing. Participation edged up again, to 61.9%, the highest since March and up from 61.4% in July, yet unemployment still slipped to 4.1%. That combination points to strong demand for workers from a labour force that does not have the supply to match it, although we remain cautious on the signal NFPs provide given their large revisions. Wages provide a less noisy guide on the tightness of the labour market, and they do not show the pressure yet. Average hourly earnings rose 3.1% over the year, below consumer price inflation, so real wages are falling rather than catching up. October's 0.4% rise lifted the three-month annualised pace to about 3.9%, so some pressure may be building in the background. That argues for tightening steadily, not faster.

Inflation: Hot, but core is not accelerating

Consumer prices rose 0.4% in October, above expectations, after 0.6% in September. Food (+0.5%) and energy (+0.7%) did much of the work. Core CPI rose by 0.3% for the third month straight, taking the 3m-annualised rate to 3.7%. The components that feed into the PCE index point to a similarly firm core PCE print. This persistent price pressure settled the December hike. But core inflation is running at a steady pace rather than speeding up, and much of the headline strength still reflects the energy shock moving through food and transport prices.

Why not 50bps?

Governor Waller has said a 50bps hike should be considered if core inflation kept running at around 0.3% a month, arguing that "hiking only 25 basis points would put our credibility at risk." On this test, the October CPI report qualifies. Most other voting members seem to agree. All three recent hawkish dissenters, Hammack, Logan and Kashkari, have advocated for small steps. The first two as recent as the past week, although admittedly before the inflation print. We agree that it is the right call. First, wages are still lagging prices, so there is no second-round dynamic yet for a jumbo move to break. Second, the sequence matters more than the size. Waller himself says the timing of hikes matters less than delivering them. A 25bps hike now with another one in the pipeline, if needed, adds the same tightening, with six more weeks of data in hand. Third, markets are doing some of the Fed’s tightening work for it, with both the 2 and 10 year yields rising in response to the data. Finally, credibility is intact where it matters most: the five-year, five-year-forward breakeven inflation rate was 2.15% after the CPI release, slightly below its level a year ago.

Will upcoming data change the call?

The November jobs report on 4 December will add little to this picture. The bigger complication is timing: the FOMC decides on 9 December, but the November CPI is published on 10 December. The FOMC will likely have a preview of that report in hand when it decides, so it will know more about November inflation than markets do. We see the risks to that print skewed to the upside. Core has been running at around 0.3% a month, services excluding shelter and energy at 0.4%, and higher costs further up the supply chain are still passing through to consumer prices. A downside surprise large enough to put the hike in doubt looks unlikely. An upside surprise is the main way the Fed ends up at 50bps. On the data we have now, though, a 25bps hike remains the right call.