* ISM’s September Services PMI topped expectations and should drive GDP expectations higher.
* September New Orders surged, but preparations for the October port strike are a likely factor.
* Friday's September Employment Report could surprise to the upside.
* We’re sticking with our plan as good economic news may be bad news for rate cuts.
If there was any question about the services area powering the overall economy, ISM’s September Services PMI should put that thought to rest. Not only did the September headline PMI figure of 54.9 come in well ahead of expectations (51.7), but it was also considerably stronger than August’s headline figure of 51.5. Moreover, new order growth in September surged to 59.4 from 53.0 the month before, hitting the highest level in the last 12 months.
Before we get too excited, though, odds are some of this upside surprise stems from companies preparing for the expected October port strike that is now underway. Our view on the port strike continues to be focused on its duration. The longer it goes, the greater the risk to the economy, the holiday shopping season, and the undoing of recent inflation progress. Already, long lines of container ships are queued up outside major U.S. ports as the biggest dockworker strike in nearly half a century enters its third day, preventing unloading and threatening shortages of everything from bananas to auto parts.
All in all, the data are going to help lift the Atlanta Fed’s GDPNow rolling GDP forecast, which was revised lower to 2.5% following the September Manufacturing PMI data earlier this week. It’s also going to push the Citibank Economic Surprise Index (CESI) further into positive territory.
Moving past the headline and new order data, ISM’s findings showed hiring in the services sector slowed in September, but the prices component jumped to a reading of 59.4 from 57.3 in August. This was also the highest level since January and suggests we may not see as much progress in the September inflation data as was previously thought. Tying this to our comments about the port strike, we could see a further climb in this data for October depending on how long the port strike lasts.
That pricing development along with the ensuing GDP revisions is not going to support thinking the Fed will deliver another outsized rate cut at its November meeting and a total of three 25-basis point rate cuts before the end of the year.
However, with Fed officials now focused on both parts of their dual mandate, the attention will soon shift to Friday’s September Employment Report. The consensus forecast calls for 140,000 non-farm jobs to have been added during the month, down modestly from the 142,000 added in August. While September PMI reports showed slower hiring in both parts of the economy, let’s remember ADP’s September Employment Change Report was ahead of market expectations and showed considerably more job creation compared to August.
When we looked at Thursday morning’s September Challenger Job Cuts report, it tallied 72,821 job cuts, down slightly month over month. At the bottom, the report also noted “US employers announced 403,891 hiring plans in September, with 401,850 coming from seasonal employers, both in Retail and Transportation/Warehousing.”
As we think about that, the timing of Amazon’s (AMZN) October 8-9 Prime Big Deals Day, which will no doubt kick off the holiday shopping season and pull sales forward, is earlier than last year and in 2022 by a few days. It is possible the September Employment report could benefit from the ramp in seasonal hiring ahead of that event as well as competing ones from other retailers such as Walmart (WMT) and Target (TGT) .
We say this as Amazon announced it would hire 250,000 seasonal workers for the 2024 holiday shopping season. Recently, Target shared plans to hire about 100,000 seasonal employees to work in its nearly 2,000 stores and more than 50 supply chain facilities across the U.S. That not only suggests Challenger’s 403,891 figure may be low, but it also helps explain some of the strength found in ADP’s September job creation figures for the services sector.
Where we’re going with all this is there is a possibility Friday’s September jobs report will come in stronger than expected. Granted it may be more due to part-time jobs, but as far as the Employment Report is concerned a job is a job even if the real world knows the difference between a full-time one and a part-time one. If that is the scenario that plays out, it will be another one that signals the market may need to re-think the three rate cuts it expects for this year.
In an environment where bad economic news is good news for rate cuts, the CESI moving further into positive territory means good news for the economy may not be good news for rate cuts. Until we digest the September Employment Report, we’re going to stick to the sidelines.
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At the time of publication, TheStreet Pro Portfolio was long AMZN.
