(Bloomberg Economics) —
Investors will watch next week’s data carefully for any signs of stagflationary tendencies in the U.S. economy. That comes just before an FOMC meeting the following week that will almost certainly result in a formal announcement of a timeline to taper pandemic-era asset purchases.
For the Fed, the 3Q slowdown in economic activity (GDP, Thursday; durable goods, Wednesday) will have been expected and won’t provide new information to sway its taper decision. Indeed, Vice-Chair Richard Clarida has dismissed the slowdown as having a just a “flavor” of stagnation, but not forming a trend. In any case, Bloomberg Economics expects activity to bounce back in the current quarter. Supporting that view, September retail data and the recent Beige Book pointed to a pick up in consumer spending. New pandemic lows in initial jobless claims (Thursday) also augur improvement in the labor market.
Inflation has seemed more worrisome lately, with energy prices surging and business surveys reflecting endless complaints about labor shortages and supply-chain bottlenecks. But perhaps to the Fed’s relief, their preferred price and wage inflation indicators — core PCE inflation and the employment-cost index (both Friday) — likely will show a less alarming pace of increase. September’s employment-cost index will likely suggest that the faster pickup in wages isn’t close to sparking a “wage-price” spiral. Core PCE could undershoot consensus, in our view.
In the meantime, other less favorable inflation indicators will continue to scream for the Fed’s attention: house prices (pending home sales, Thursday; Case-Shiller index, Tuesday) will portend that the increase in the CPI’s shelter prices will stick around. The consumer sentiment index (Friday) will likely register complaints about higher energy prices.