The Global Week Ahead: The Changing Seasonals

Next Week's Risk Dashboard

• Nonfarm payrolls could bring in more supportive seasonals
• Eurozone core CPI is expected to be the first truly soft reading
• Four questions for Chair Powell in his keynote speech on the outlook
• Heavy ECB-speak to inform whether soft core CPI opens up back-to-back cuts
• BanRep could upsize cutting this week
• Did China’s stimulus portend weak PMIs this week?
• Other light global macro
• Canadian markets shut on Monday

Chart of the Week

The coming week’s main focal points are likely to be US nonfarm payrolls and wages, Eurozone CPI, and potentially key central bank speak from Federal Reserve and ECB officials. As the seasons shift to autumn in the northern hemisphere, so may the seasonal adjustments to nonfarm payrolls become more favourable and—if so—then in a way that may temper concerns about the US job market and how quickly the FOMC should be cutting rates. Watch for key addresses by Powell and Lagarde plus other officials, and Colombia’s central bank will offer the week’s only policy decision that could go more aggressively this time.

NONFARM PAYROLLS—THE SEASONALS MAY START TO TURN

The FOMC’s pivot toward placing more weight on the full employment part of its dual mandate following a string of soft core inflation readings puts increased emphasis upon Friday’s payrolls. How it turns out may influence market sentiment toward whether the FOMC delivers another 50bps cut on November 7^th or sticks to guidance in favour of a pair of 25bps moves into year-end. A caution lies in the fact that this is one of two payroll reports before the next decision with the next labour market update due on November 1^st.

I’ve gone with a gain of 165k and will explain why there is more likely to be upside than downside risk to consensus expectations for a gain of around 140k. In fact, we can’t exclude the possibility of a materially higher gain.

A key issue is that seasonal adjustment haircuts to the seasonally unadjusted estimate for the change in nonfarm payrolls should begin to turn in such a way as to add some upside to job growth starting with September’s reading.

Over recent months, seasonal adjustments to payrolls have been weaker than the historical norms for like months in history especially when compared to pre-pandemic seasonal adjustments. That drove some of the weakness in the change in nonfarm payrolls by contrast to earlier in the year when seasonal adjustments inflated payroll gains.

That starts to change now. As chart 1 shows, September’s SA factors have been higher during the pandemic era than the historical SA factors for like months of September. This means they will haircut the NSA change less significantly. The September SAs are all still below one to compensate for seasonal hiring this month, but there has been a gradual upward trend in SA factors dating back many years even before the pandemic and yet particularly over more recent years. This is why September’s SA factor up to 2019 averaged lower than over the whole history of Septembers (chart 2).

Why this matters requires some scenarios to more fully understand the sensitivities. If we take a half million seasonally unadjusted gain in nonfarm payrolls which wouldn’t be terribly unusual for like months of September, then going toward the relatively higher SA factors of recent years could translate into a nonfarm payroll gain of as much as 200k. Chart 3 shows other scenarios for what happens to the change in seasonally adjusted nonfarm payrolls for the same NSA number using different SA factors including big declines if somehow this year’s September SA factor reverts toward the lowest ones on record for like months of September.

If this is what happens, then we could be about to gradually move away from the role played by seasonal adjustment factors in tamping down monthly job gains toward adding to them. Those SA factors in recent years have overstated job growth at the beginning of the years, and understated the gains around the middle of each year (chart 4). The same is true for other job market readings including how consumers perceive the availability of jobs. Something changed in the pandemic era that may be owing to the timing of the initial shocks and the timing of the recovery, but also began to change before then.

Before we get to payrolls there will also be other job market readings to consider. JOLTS job openings for August land on Tuesday followed by ADP private payrolls for September on Wednesday. Then Challenger mass layoffs during September arrive on Thursday. Employment subindices to ISM readings might also blend in with the other releases to inform payroll expectations, but I doubt it given that payrolls are a different animal altogether.

And watch wages. Wage growth is hardly light in the US (chart 5).

EUROZONE INFLATION—WILL IT CHANGE THE ECB’S OPENNESS TO GOING BACK-TO-BACK?

Tuesday’s Eurozone CPI estimate is shaping up to be a soft one. Key will be core CPI. Unfortunately, the data arrives after President Lagarde speaks the day before but before multiple other ECB officials speak over the coming week as explained further in the next section.

Figures from Spain and France are teeing up expectations for a very soft Eurozone core CPI estimate. That would be welcomed after just about every reading this year has tended to be a hotter than seasonally normal, such as the prior readings for August core CPI and services CPI (charts 6, 7). 

Spain’s core CPI in m/m NSA terms fell by the biggest amount on record compared to like months of September (chart 8). France’s headline inflation and core details were also soft in m/m terms. Germany and Italy will seal the deal for the Eurozone estimate when they update on Monday. 

And yet when Lagarde spoke at the September press conference, she was clear that the decision in October wouldn’t just be a function of a single data point in between the meetings. Ideally I’d say she’s right to say so in the context of the string of warmer than seasonally usual core CPI readings throughout the year. Then again, this feels like a very opportunistic environment across global central bankers.

CENTRAL BANKS—KEY QUESTIONS FOR THE FED AND ECB AS BANREP MIGHT SUPERSIZE

Federal Reserve Chair Powell’s talk, a wave of ECB-speak, and BanRep’s decision might be light on actual decisions but should still offer plenty to consider among central bank watchers.

Four Questions for Powell’s Outlook

Federal Reserve Chair Powell delivers an updated economic outlook at the National Association for Business Economics annual meeting on Monday (1:55pmET). He may be smart to jump ahead of Friday’s payrolls, but there hasn’t really been much by way of new information since his press conference on September 18^th. GDP was left unchanged at +3% q/q SAAR for Q2. Core PCE was a touch weaker than expected at 0.1% m/m SA. Other readings have been minor.

Still, I would like to hear him address four things. First is that the Committee attempted to convince markets that a 50bps cut was a one-and-done move, and yet markets are priced for another 75bps of cuts over the year’s two remaining meetings. Is he ok with that, or will his eagerness to deliver a super-sized cut out of the gates in an economy growing by 3% and in clear excess capacity be marked by greater caution this time? While the FOMC’s dot plot tends to perform poorly further out in time, it usually performs much better within the current year especially at an advanced point in the year (chart 9). Recall that the September dot plot only projected 50bps of cumulative cuts in November and December.

Second, why is it that despite cutting 50bps and increasing projected easing by 75bps by next year they nevertheless left projected growth unchanged at 2% next year and in 2026 while revising up projected unemployment as argued here. Does this embed more pessimism over future prospects absent additional easing? If so, then why did Powell not address why during his presser? Shrugging his shoulders while avoiding it as random numbers scribbled down by Committee members shouldn’t cut it for a Fed chair.

A third question might be why they felt compelled to go with a 50bps cut in September. I didn’t find Powell’s explanation to be compelling and don’t buy that they simply went with the fact markets were a little closer to expecting 50bps than 25bps. The Committee certainly didn’t give markets what they wanted earlier this year, so what changed?

A fourth issue speaks less to the outlook than to the kind of forward guidance environment we may now face. Is it the case that from now on the FOMC won’t seek to provide guidance into future meetings? Its communications into the September 50bps upsized cut were poor and this time the Fed chose not to use clandestine communications tactics during its blackout period to put out a message to key media. The FOMC kept markets hanging between 25bps and 50bps. Is this the new normal after years of seeking to avoid any risk of surprise on game days? If so, then markets should brace for a continuation of higher volatility around FOMC meetings than they’ve been accustomed to for some time.

Other Fed-speakers on tap will include Governor Bowman on Monday and Wednesday after she dissented in favour of 25bps and has been appearing frequently on the speakers’ circuit, Atlanta’s Bostic three times on Monday, Richmond’s Barkin and Boston’s Collins (Tuesday), St. Louis President Musalem and Cleveland’s Hammack (Wednesday), and Minneapolis President Kashkari (Thursday).

Is The ECB Still Setting A High Bar to Cutting Back-to-Back?

Not to be outdone, ECB-speak will be ramping up throughout the week starting with President Lagarde’s appearance before the EU Parliament on Monday and then followed by speakers every day except Thursday. Here the issue will be guidance on appetite for another cut at the October 17^th decision despite guidance that accompanied the last cut on September 12^th that sounded as if a skip was in order. Markets are pricing about 80% odds of a cut in October and placing significant on fresh evidence on core inflation that is tracking softly into the full numbers this week. At the September presser, Lagarde seemed to distance herself from openness toward back-to-back cuts by emphasizing the “relatively short period” and small amount of data before the next decision and the fact that another update on key wages data won’t be available until November 19^th.

BanRep Might Supersize This One

Banco de la Republica de Colombia (BanRep) is expected to cut its policy rate by another 50bps on Monday. It would be the fifth consecutive 50bps cut if so. However, our Latam-based economist, Jackeline Piraján, thinks they could cut by 75bps and emphasizes "the evolution of inflation, more relaxed international financial conditions and the need to support economic recovery". Since the last cut on July 31^st, core CPI has continued to decline to 6.8% y/y and m/m seasonally unadjusted core CPI has been rising at a much more normal pace compared to like months in history.

GLOBAL MACRO—DID CHINESE AUTHORITIES FEAR THE PMIS?

Chart 10 summarizes other key readings that are out this week excluding ones that have already been addressed.

China updates the state and private sector purchasing managers’ indices on Monday. They have all been hovering around little to no growth. The Caixin private PMIs have very slightly outperformed the states and tend to be skewed more toward smaller producers in coastal cities versus the state PMIs’ emphasis upon the SOEs. China’s authorities didn’t need the Fed to cut 50bps in order to do much of what they’ve announced of late; some of the explanation might lie in fear toward coming data in addition to soft performance to date.

Canadian markets will be shut for the National Day of Truth and Reconciliation (aka ‘Orange Shirt Day’) on Monday. They won’t have much to consider by way of domestic developments for the rest of the week and will instead be driven by external developments, namely US payrolls. Canada only faces updated PMIs for September on Tuesday and Thursday, plus the Ivey PMI on Friday—none of which tend to be impactful to domestic markets.

Anything not named payrolls or Jay Powell is sure to get short shrift in the US this week. If anything else matters, then a pair of ISM reports on manufacturing (Tuesday) and services (Thursday) are the most likely candidates. ISM-manufacturing is likely to continue to indicate a sector that is in contraction—even though the Fed’s data is mixed with sector output on an oscillating pattern of ups and downs including a strong gain in August. ISM-services is expected to remain in mild growth territory. Tuesday’s vehicle sales could pose a significant gain based on tentative industry guidance. Construction spending (Tuesday) could pop higher in sync with a gain in housing starts during August, and factory orders are expected to post little change for August (Thursday) after durable goods orders were flat.

Several countries will refresh CPI estimates starting with Peru, South Korea and Indonesia on Tuesday, followed by Switzerland and the Philippines on Thursday.

Other releases will include PMIs from Mexico (Wednesday) and Brazil (Thursday), Japan’s Q3 Tankan reports on business conditions in manufacturing and services (Thursday), Chile’s monthly GDP-related indicator (Tuesday) and Australian consumer spending (Thursday).