The Fed faces four straight days of labor and inflation data before its October meeting. Here’s why PCE, payroll revisions, and bond yields may matter more than Friday’s headline jobs number.
KEY TAKEAWAYS
The Fed is getting four straight days of labor-market data before its October meeting. Friday’s payroll report gets the attention, but several earlier releases could shape the decision first.
The labor market increasingly looks “low-hire, low-fire.” Companies are not laying people off aggressively, but hiring and worker confidence appear much less robust than the unemployment rate alone suggests.
The inflation picture depends heavily on which measure you use. Core CPI has cooled considerably, while the Fed’s preferred core PCE measure remains notably hotter.
Payroll revisions may matter as much as Friday’s headline number. Recent months have already been revised substantially, and August data are particularly vulnerable to seasonal distortions.
Higher-for-longer rates have direct portfolio consequences. Long-duration bonds, bond-like dividend stocks, and growth companies with distant cash flows all become more sensitive as discount rates rise.
MY HOT TAKES
The market is paying too much attention to Friday at 8:30 AM. Wednesday’s PCE reading and the revisions underneath Friday’s payroll report could ultimately matter more for Fed policy.
A strong jobs report is no longer automatically bullish. With inflation still above target and the Fed already tightening, economic strength can become justification for another rate hike.
The CPI-PCE gap is being seriously underappreciated. Declaring inflation “solved” using the cooler measure misses the fact that policymakers are watching the hotter one.
The labor market is healthier on the surface than it feels underneath. Low layoffs disguise weak hiring, while real wage pressure means many households are still losing purchasing power.
Investors should identify their hidden duration bets now. A portfolio can be much more dependent on falling interest rates than its owner realizes–even without owning a lot of bonds.
You can quote me: “The paycheck is still losing to the price tag.”
Peripheral vision. I am a professional eye strainer! I wake up when the sun is up ON OTHER CONTINENTS and almost immediately set my eyes on a screen of some variation. If you have been to my NYC office or seen any of my videos, you would know that I quite literally surround myself with screens and data. While they are a rich source of vital information necessary to do what I do, they are also the cause of a great deal of eyestrain. The good news is that I have a really good eye doctor who takes good care of my signature green eyes. Despite this and the fact that my eye Doc is a really nice guy, there are few moments in life more quietly stressful than my annual eye exam. Not the puff of air–although I have never once been ready for the puff of air–but the part that comes after. You're sitting in the dark, chin on the rest, forehead pressed against that big contraption (it's called a phoropter, if you want to impress your optometrist), and the doctor starts flipping lenses. Click. "What's better—one…" Click. "…or two?" You squint at the chart, and honestly, they look EXACTLY the same. So you guess. "Two?" Click. "Okay—two, or three?" Now you're second-guessing everything. Was two really better? Did I just ruin my prescription for the next twelve months? You're allowed to ask to see one again, by the way. Nobody ever does–though I do. We all just want to get the answer right and get out of the chair.
I thought about that chair this morning, espresso number 2–or was it 3–in hand, staring at the economic calendar for the week ahead. Because it's the same exercise, lens after lens, click after click, and a whole lot riding on whether anyone can tell the difference. Only this time, the prescription isn't for a new pair of glasses. It's for your portfolio.
This week, the Federal Reserve is sitting in that chair. FOUR straight days of labor-market data are coming, and each one gets flipped down in front of the committee with the same question. What's better–hike again in October, or hold? The Fed meets again in late October, and Friday's September jobs report will be the last full read on the labor market it gets before walking into that room (the October report won't arrive until after the meeting). So every lens counts, and a few count a lot more than the headlines will tell you.
First, understand why this week reads differently than it would have a year ago. For years, a strong jobs number was good news for markets–strong economy, strong earnings, everybody happy. Not anymore. The Fed RAISED its benchmark rate by a quarter point on September 16, lifting its target range to 3.75%-4.00%. The Fed Funds futures market (where traders effectively bet on where the Fed is headed) now puts the odds of another hike in October at roughly 70%. A month ago, those odds were below 20%. And the 10-year Treasury yield is sitting at levels we haven't seen since 2007. In that world, a hot jobs number isn't a victory lap–it's ammunition for another hike. Good news is bad news again, and the market knows it.
Lens number one flips down this morning with the JOLTS job openings survey for August (yes, August as this data runs a month behind). Openings are expected to come in little changed, a bit above 7.2 million. But I'm more interested in the quits, you know, workers voluntarily leaving their jobs. People quit when they're confident they can find something better. When they stop quitting, they're telling you something the unemployment rate won't–they're nervous. Put that next to weekly jobless claims, which came in at 197k for the week ended September 19, a level this country never saw once between 1970 and 2018, and yet one that has become almost routine this year–and you get an unusual picture. Companies aren't firing anybody—but they aren't hiring aggressively either. Economists call it a low-hire, low-fire market. I call it a labor market holding its breath. The Conference Board Consumer Confidence survey lands this morning too, and it asks the same question from the other side of the paycheck–how do the people doing the working feel about all this?
Lens number two is the one I'd circle in red, and it arrives Wednesday disguised as a jobs-week release. Wednesday brings the private payroll report, the final revision to second-quarter GDP, and the Personal Income and Spending report—which contains the PCE price index (Personal Consumption Expenditures, the Fed's PREFERRED inflation gauge). Core PCE was running at 3.3% over the year in July, more than a full point above the Fed's 2% target. (Wednesday is also the last day of the quarter, when big institutions rebalance their portfolios, so don't read too much into every twitch in prices that afternoon.) Here's the detail almost nobody is talking about. The CPI / Consumer Price Index–the inflation number that makes the evening news–showed core inflation at just 2.4% in August, the lowest since March 2021. Two thermometers in the same room, nearly a full point apart, and the Fed reads the HOTTER one. The two are built differently–PCE covers a wider basket, including health care paid on our behalf by employers and government–and right now that difference is not a rounding error. It's the whole ballgame–the whole ballgame! Anyone who tells you inflation is "basically solved" is reading the wrong thermometer.
Lens number three, on Thursday, is the quiet one–a sleeper number as I like to call it–the tally of corporate layoff announcements (Challenger Job Cuts), another round of Jobless Claims, and the monthly factory survey. On their own, none of these moves the needle much. Together, they tell us whether the low-fire half of this economy is starting to crack. If claims break meaningfully higher from here, the whole picture changes.
And then Friday, the big lens–the first full read on the labor market since the September hike. Consensus expects around 90,000 jobs added in September, with unemployment staying constant at 4.1%. But look hard at what that's being compared to. August's 162,000 was more than FIVE times the 31,000 average monthly gain of the prior twelve months–an outlier, not a trend. And first reads are first drafts. July was originally reported as a LOSS of 23,000 jobs, and it has since been revised to a GAIN of 21,000. August figures are notorious for getting revised as seasonal quirks wash out. So on Friday, the Fed gets three lenses at once: September's first draft, August's second, and July's third. The revisions could easily matter more than the headline, and almost nobody will be talking about them at 8:31 AM Wall Street Time.
One more number deserves a harder look than it got. Average hourly earnings rose 3.1% over the past year. Consumer prices rose 3.4%, with gasoline up 27.4% over the same stretch. Do the math. The paycheck is still losing to the price tag. A labor market can look "strong" on the evening news and still leave working families falling behind at the kitchen table. That's the K-shaped economy in one line. Folks with assets are enjoying higher yields, while people living on wages are watching the gas pump outrun the raise.
So which prescription does the Fed write? If Friday runs hot and Wednesday's PCE stays sticky, the October hike practically writes itself. If the number comes in soft, the Fed gets cover to pause–but a softening job market with inflation well above target raises an uglier question. Does the word “stagflation” creep back into polite conversation? Both outcomes are possible, and I'd be suspicious of anyone who tells you with certainty which one we're getting.
And hovering over all of it is the bond market, which has already made its view known. Yields don't climb back to 2007 levels because investors expect the Fed to go soft. They climb when investors believe rates will stay higher for longer—and want to be paid for the risk that inflation doesn't cooperate. The Fed may be the one sitting in the chair, but the bond market is holding the eye chart.
Which brings it home to your portfolio. When rates are the story, everything priced off rates gets repriced, which means long-dated bonds, dividend stocks treated as bond substitutes, and growth stocks whose value depends on earnings far in the future (the further out the cash flows, the more a higher rate shrinks what they're worth today–it’s just math, silly). So ask yourself: How much of my portfolio is quietly a bet that rates come down, and am I comfortable with that bet if they don't? If I'm an income investor, am I reaching for yield at the long end while the Fed is still tightening–or is the short end paying me to wait? When consumer companies report earnings, am I listening for the headline beat, or for what they say about margins and pricing power? And am I going to react to Friday's headline at 8:30 AM–or to the revisions buried underneath it? 😉 None of these questions has a one-size-fits-all answer. That's the point. They're the questions worth asking before Friday morning, not after.
Here's the dirty little secret of the eye exam. By the time the doctor gets to that final "what's better–one, or two," the prescription is already written. The earlier lenses did the real work. The last flip is just confirmation. That's this week in a nutshell. Wall Street will treat Friday's jobs report like the moment of truth, but Wednesday's inflation lens and the revisions tucked inside Friday's report may have already written the Fed's prescription. The number everyone's squinting at isn't the exam. It's just the last click of the lens. And unlike the rest of us, the Fed doesn't get to ask to see one again.
YESTERDAY’S MARKETS
Stocks fell yesterday, with the Dow declining 347 points, or 0.67%, to 51,481, the S&P 500 losing 0.77% and the Nasdaq Composite sliding 0.92%. Only three S&P 500 sectors finished higher–health care, consumer staples, and energy–while communication services was the weakest. The 10-year Treasury yield rose to about 5.24%, holding near its highest level since 2007. Brent crude settled up 96 cents at $105.28 a barrel, and WTI added 19 cents to $92.60.
NEXT UP
FHFA House Price Index (July) is expected to have risen by 0.1% after being flat last month.
Conference Board Consumer Confidence (September) may have slipped to 89.0 from 89.4.
JOLTS Job Openings (August) probably fell to 7.228 million from 7.271 million vacancies in the prior period.
Fed speakers today: Bowman, Barr, Goolsbee, Musalem, Williams, and Waller.