Core PCE, GDP, Other Inflation Data Set to Move Equities & Bonds This Week

SPEAKER_1 (0:00)

Welcome back to Morning Trade Live. It's time now for the big picture. So let's welcome in the team from Charles Schwab, Center for Financial Research, Liz Ann Sonders, Chief Investment Strategist, and Kevin Gordon, Head of Macro Research and Strategy. Thank you so much to both of you for your time, and hope you had a great weekend. Liz Ann, kicking things off with you. Very busy week, very consequential, as far as this top tier economic data off the back, where it was a quieter week in some respects last week. End of the Q3 as well. I'm just wondering what investors might be paying attention to.

Liz Ann Sonders (0:30)

Well, obviously the PCE report is going to be important, but it's always important to remind inflation watchers that PCE doesn't tend to print well outside the band of consensus expectations, because once you have the PPI and the CPI, you can essentially map the components over to PCE, but then of course labor market data as well. I think the key releases that came out last week are actually S&P Global's version of the PMIs, and that showed heat not just in terms of the economy, but also the prices component too. So we have not put this inflation genie back in the bottle by any means.

SPEAKER_1 (1:09)

For sure. Obviously, Kevin, we have a lot on the docket this week. I'm just wondering exactly which metrics, which data points beneath the surface you're going to be paying attention to the most.

Kevin Gordon (1:23)

Yeah. I think Liz Ann makes a good point with the PMIs because if you look at not just S&P, but what was the consistent theme across some of the regional PMI data that we got, there was some weakness in some areas related to demand and new orders. But if you look at the input price components and prices paid, that consistently across the board has been the sticking point, and that's been the issue. So reinforced by S&P Global, reinforced probably, I would assume, by what ISM has to say this week. And I would also add into the inflation discussion, you now I think introduce, just because of some of the trends we've been seeing and other labor data, particularly jobless claims, I think you introduce some discussion around what could be wage-related inflation pressure that's picking up. And even if you look at the differential between the wage growth tracker from the Atlanta Fed and what has been still a decelerating trend for average hourly earnings in the non-farm payroll statistics that we get, the latter has been biased more by composition effects in terms of who's hiring more. It's more of the lower-paying industries. So if you actually adjust for that, we have seen a bit of a turn in wage growth. And I think that that's going to be a little bit more of a part of the discussion, at least a key part of the discussion, if that continues as we head into the end of the year and hiring picks up, if that's confirmed by the jobs report that we get on Friday.

SPEAKER_1 (2:39)

Okay, we'll be watching. And as it relates to the market, Liz Ann, how would you suspect we react this week off the back of all of this, particularly because we are looking at that close correlation between the 10-year and oil right now and then that inverse relationship with stocks?

Liz Ann Sonders (2:56)

Yeah, no, I think that the inflation data will be key. It certainly has the potential to change the expectation around what the Fed is going to do at the October meeting. We were leaning in the camp that we'll get probably two more hikes this year, but it will be the combination of the labor market and the inflation data, I think, as it relates to the inverse correlation between bond yields and stock prices. It's been our view, Sam, as you know, that we think that we're in the midst of a secular shift to an environment that looks maybe a bit more like the period from the late 60s to the late 1990s, when you had more inflation volatility, you had that inverse relationship between bond yields and stock prices, which of course means you had a positive relationship between bond prices and stock prices.

That's starkly different from the Great Moderation era, from the late 90s up until about 2022's inflation spike, where you had bond yields and stock prices moving in the same direction, which means prices moved in the opposite direction. That gave rise to classic asset allocation structures like 60-40 or 60-30-10. I think that's one of the longer-term things investors need to think about is, how do we get diversification in a slightly more sophisticated manner, not just in that traditional stocks bonds mix?