Introduction

Yes, payroll growth easily beat expectations in October and, yes, average hourly earnings did post their largest year-on-year rise since 2009. But average hourly earnings, which are a key measurement of wages, show much less pressure on a monthly basis, and it's the monthly rate that tells the truer story of October. Yet for the Federal Reserve, October's employment report clearly does underscore the need, as they see it, to cool the economy and specifically the jobs market before wages get out of hand.

The economy

Rising 3 tenths to 3.1 percent, average hourly earnings posted an expansion high year-on-year rate not seen since 2009. The popular gauge for inflation is the yearly rate and October's result forcefully evokes the minutes of the September FOMC. It was at this meeting when hawks broached the idea, for the first time this expansion, of raising rates past neutral and into the restrictive zone in order to cool the jobs market. Yet the slope of the yearly trend, as tracked in the red line, is far from straight up. The graph also tracks the PCE and core PCE price indexes which are the Fed's personal gauges on general inflation and which, as you can see, are very well behaved. In fact, they are perfectly behaved, with both sitting exactly on target at 2.0 percent and with neither showing any recent push higher.

What really limits the impact of the yearly jump is that the month-to-month rate is actually moderating. Compared to September, average hourly earnings rose only 0.18 percent in October vs gains in the 0.3 percent area in four of the last five reports. And over the last year, October's increase is below the 0.26 percent average. Looking at the monthly comparison focuses attention on the short-term trend and actually suggests that wage inflation is not accelerating at all right now. The key here is that the latest yearly rate was skewed higher by an easy comparison with October 2017, a month affected by the hurricane effects of last year which in the blow-by-blow fury of economic policy is distant history.

Yet wage pressures aside, there is no question that October was a very strong month for the labor market. Nonfarm payroll growth easily surpassed expectations in the month, rising 250,000 with strength centered in components that are especially sensitive to economic change: manufacturing with a much higher-than-expected 32,000 gain and professional & business services where payrolls rose 35,000. And available labor in construction is probably now scarcer than ever as payrolls here jumped a very sharp 30,000. Other strong readings in October include no change in the unemployment rate at 3.7 percent and a very welcome 2 tenths uptick in the labor participation rate to 62.9 percent.

Turning back to evidence of wage pressures, there was another report in the week that will also be cited by the hawks at the Fed. The employment cost index, which Fed policy makers watch as closely as average hourly earnings, continues to signal elevated price pressures for labor, up 0.8 percent in the third-quarter for a year-on-year rate of 2.8 percent. The quarterly rate is the highest of the expansion, matched twice before in the first quarter this year and the first quarter last year, while the yearly rate is also an expansion high, matched once in the second-quarter of this year. Among components, the cost of wages & salaries rose a quarterly 0.9 percent which is also an expansion high and the second such reading in three quarters. This yearly rate, as tracked by the red line of the graph, is up 1 tenth at 2.9 percent for a new expansion high. In contrast, however, the gold line of benefit costs moderated and sharply, down 3 tenths on the year to 2.6 percent. For the doves at the Fed, the slowing in benefit costs will be a counterpoint to the acceleration in wages. Nevertheless, the wages & salaries component of this report together with the yearly rate for average hourly earnings will clearly help the hawks in their argument for a rate hike.

Yet not all the news on wages is higher. Much of the week's economic data aren't pointing to any sudden acceleration at all in prices or conditions. In contrast to both the ECI and average hourly earnings, personal income for September rose only a modest 0.2 percent. And after adjusting for inflation and taxes, disposable income proved nearly dead flat again, at only a 0.1 percent monthly gain that doesn't point to much risk of runaway wages. This year-on-year rate, at 2.9 percent, started off 2018 at 3.0 percent.

Another report showing moderation is ISM manufacturing where the index fell a sharp 2.1 points in the month to a 57.7 level that missed Econoday's low estimate. New orders fell 4.4 points to 57.4 for the first sub-60 reading since April last year ending what was one of the strongest runs for this reading in the very long history of this report. Slowing in orders was particularly evident in export sales, easing by 3.8 points to 52.2 in an echo of the rival PMI manufacturing report which also cited softness in exports. Comments from ISM's sample were centered on questions over rising material costs and especially tariffs which appear to be causing shortages, triggering pre-buying, increasing import costs, and lengthening delivery times. Expectations for import delays in materials from China were also cited.

A discussion of China brings us to September's trade report where tariff effects may now be emerging in the data. The nation's trade deficit widened for a fourth straight month, to $54.0 billion in September vs $53.3 in August and $42.6 billion back in May when the tariff question was just getting rolling. September was actually a good month for exports, jumping 1.5 percent to $212.6 billion in a gain, however, offset by a 1.5 percent increase in imports to $266.6 billion. Imports of consumer goods, the sore point of the nation's deficit, rose $2.0 billion in the month to $55.4 billion in what highlights the center of the trade controversy with China. Imports of capital goods were also higher, up $2.4 billion to $60.1 billion, but imports here unlike for consumer goods point to solid business investment which will helps U.S. productivity. Exports were mostly positive especially an aircraft-boosted rise for capital goods but there was one glaring weakness, a sharp $1.0 billion decline in food exports to $11.0 billion in what may very well reflect the early effects of tariffs. Looking at unadjusted data by nation, the trade deficit with China widened to $40.2 billion in September from an already steep $38.6 billion in August. The gaps with all other leading trading partners narrowed in the month. Going into what looks like building drama for trade talks, the U.S. trade deficit was going in the wrong direction. Net exports proved very weak in the third-quarter GDP report with the outlook for the fourth quarter uncertain.

One area of the economy that is clearly cooling is home-price appreciation which, like home sales themselves, is almost at a standstill. Case-Shiller's 20-city adjusted index inched only 0.1 percent higher in August to extend, as seen on the graph, the weakest monthly run since early in the expansion. Year-on-year, the unadjusted index is still growing at a healthy rate of 5.5 percent which, however, is down from 6.8 percent as recently as March and is the lowest rate since December 2016. Outright monthly declines were posted in two cities where price traction is clearly slipping, Seattle at minus 1.0 percent in the month for year-on-year growth still very strong at 9.6 percent, and San Diego which fell 0.3 percent in the month for a mediocre year-on-year rate of 4.8 percent. Las Vegas is once again the big headliner in the data, posting 1.1 percent monthly growth in August following 1.2 and 1.1 percent in the prior two months. And Las Vegas leads the year-on-year growth rates at 13.9 percent. At the bottom, however, remain Washington DC and New York City at only 2.8 percent growth with Chicago little better at only 2.9 percent. Case-Shiller's data are consistent with weakness seen in FHFA's house price index as well price data in the existing home sales report. However strong the 2018 economy is and however much the risk that inflation could begin to accelerate, the pressure doesn't include home prices which are at the very center of household wealth.

Markets: Tariff tantrums dominating stocks

However much inflation may or may not be stepping up, the stock market is definitely hopping to the tune of tariffs. Comments early in the week by President Trump, who sounded optimistic for a deal with China, sent shares sharply higher and nearly made for a full recovery of the prior week's 3.0 percent rout in the Dow. But the momentum faded by Friday after October's strong payroll growth and 3.1 percent wage rate reawakened the prospect of Fed rate hikes. Any reminder of rate hikes is generally not good for the bond market where yields backed up noticeably, 10 basis points higher for the 2-year at 2.91 percent and up 14 basis points to 3.22 percent for the 10-year. And higher rates are generally a positive for the dollar which is a reminder that for China, possible currency devaluation and the sinking of the yuan could have a heightened effect if the dollar, underpinned by Fed rate hikes, turns higher at the same time.

The bottom line

The verdict is still out whether wage traction is in fact beginning to build. But remember, time and again over the last year hints here or there of sudden pressure, including in average hourly earnings, never played out. But the truth may be of less importance than the appearance, as the  glimpse of wage inflation supports what can fairly be described as the Federal Reserve's determined effort to raise interest rates.

Week of November 5 to November 9

Though no one on Econoday's panel may think so, anything is possible even perhaps an out-of-the-blue rate hike at the week's FOMC, one that would be aimed at slowing the labor market and underscoring the Federal Reserve's independence. But forecasters are unanimously calling for no FOMC hike in an outcome (one that will be issued on Thursday, not Wednesday) that nevertheless looks to be the highlight a low action week. Monday opens with October updates from PMI services and the ISM's non-manufacturing sample which is coming off a record showing in September. On Tuesday JOLTS data will tally the latest number of job openings, which have been swelling, and the latest number of quits which may also be picking up. Inflation will be Friday's highlight with the latest from the producer prices, a report that has yet to pick up the sharp cost increases and pass through being reported in regional and private business surveys. Expectations for inflation, specifically consumer expectations, will be a central focus of Friday's consumer sentiment report where confidence reading, unlike inflation readings, have been approaching long-term highs.

Monday

PMI Services for October Final

Consensus Forecast: 54.7

Consensus Range: 53.0 to 54.9

A robust gain in new orders pushed PMI services higher in the October flash to a better-than-expected 54.7. The consensus for October's final is no change at 54.7. This index ended September at 53.5.

ISM Non-Manufacturing Index for October

Consensus Forecast: 59.4

Consensus Range: 56.0 to 61.2

Modest slowing at a still highly elevated rate of growth is the call for ISM's non-manufacturing index for October, at a consensus 59.4 vs a record 61.6 in September that, for a second straight month, came in well above expectations. Record readings for employment and business activity led September's report that also included shortages and cost pressures.

Tuesday

JOLTS: Job Openings for September                            

Consensus Forecast: 7.100 million

Consensus Range: 7.100 to 7.125 million

The gap between demand for labor and supply for labor has been widening dramatically and pointing to the risk of wage inflation. Forecasters see job openings holding steady at 7.100 million vs 7.136 million in August. Quits, which are tracked as an indication for wage inflation, look like they may finally be picking up.

Wednesday

Consumer Credit for September

Consensus Forecast: $16.5 billion

Consensus Range: $14.9 billion to $21.5 billion

Easing growth of $16.5 billion is expected for consumer credit in September following an August rise of $20.1 billion that showed an increase in revolving debt.

Thursday

Initial Jobless Claims for November 3 week

Consensus Forecast: 213,000

Consensus Range: 210,000 to 214,000

Hurricane effects have come and gone but forecasters see virtually no improvement for the November 3 week, at a consensus 213,000 for initial claims vs 214,000 in the October 27 week.

Federal Funds Target for November 7 & 8 Meeting

Consensus Forecast, Midpoint: 2.125%

Consensus Range: 2.00% to 2.25%

Despite strong economic growth and the rise in average hourly earnings, there are no expectations for a rate hike at the November FOMC. There are expectations, however, for action at the December 18 & 19 meeting which, unlike this month's meeting, will be accompanied by updated FOMC forecasts and a press conference. In an announcement slated for Thursday, the FOMC is expected to hold its federal funds target range at a range between 2.00 and 2.25 percent with an implied target of 2.125 percent.

Friday

PPI-FD for October

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.4%

PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%

PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%

A jump in transportation and shipping costs was the only wrinkle in what was otherwise a subdued producer price report for September with the consensus for October pointing to more of the same. Following September's 0.2 percent increase, another rise of 0.2 percent is expected for October producer prices. When excluding food and energy, prices are also expected to rise 0.2 percent as they are when excluding food, energy and trade services.

Consumer Sentiment Index, Preliminary November

Consensus Forecast: 98.0

Consensus Range: 95.0 to 99.1

At a consensus 98.0, the consumer sentiment index is expected to ease in the preliminary reading for November. October's final reading was 98.6 with the month's preliminary reading at 99.0.

Wholesale Inventories for September

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: -0.3% to 0.5%

Wholesale inventories, which have been lean relative to sales, are expected to rise a modest 0.3 percent in September, unchanged from the month's advance reading and compared against a sizable 0.9 percent build in August.