Heidi Gutman | CNBC

Ahead of the release of the latest consumer price index reading this week, Allianz Chief Economic Adviser Mohamed El-Erian told CBS’ “Face The Nation” Sunday that he predicts headline inflation “will probably come down to about 8%,” but that core inflation “is still going up.”

Core inflation is what measures the drivers of inflation and how broad they are, so El-Erian said an increase in core inflation means “we still have an inflation issue.”

Even if core inflation is still on the rise, however, El-Erian said it will eventually come down.

“The question is, does it come down with a slowdown in the economy or a major recession?” he said on “Face the Nation.”

The oil producer group OPEC+ announced its largest supply cut since 2020 on Wednesday, and El-Erian said this decision “does hurt the U.S.,” as it risks causing inflation to increase again. But he said the cut did not come as a surprise since the group is looking to protect oil prices in the face of declining demand.

“That’s what they do,” he said. “But it’s certainly not good news for the U.S. economy.”

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A “Now Hiring” sign is displayed during a job fair for Hispanic professionals in Miami, Florida.
Marco Bello | Bloomberg | Getty Images

The unemployment rate among Hispanic workers dropped sharply in September, but that could be due to fewer eligible adults looking for a job.

Hispanic workers saw their unemployment rate fall to 3.8% from 4.5% in August. Broken down by gender, unemployment declined to 3.2% among Hispanic males over 20 years old and 3.6% among females.

The decline is much bigger than the one seen at the country level. The government said the overall jobless rate fell to 3.5% from 3.7% in August, its lowest level since July. A total of 263,000 jobs were created last month, less than a Dow Jones forecast of 275,000.

But Hispanics saw a sharp decline in labor force participation, which tracks how many people are employed or searching for work. It fell to 66.1% from 66.8% in August, indicating fewer individuals are finding employment or searching for work as the employment-to-population ratio tracking the proportion of the population employed dipped to 63.5%.

“That decline from 4.5% in August to 3.8%, while really significant, has to be tempered by the fact that clearly, Latinx workers withdrew from the workforce,” said Michelle Holder, a distinguished senior fellow at Washington Center for Equitable Growth. Many Hispanic workers do seek employment in some areas of the market heavily affected by Federal Reserve interest rate hikes, she added.

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While Hispanic workers saw the biggest declines on a month-to-month basis, she noted that Black women have still seen the sharpest decline in labor force participation since the start of the pandemic.

While the decline in participation is a reason for concern, areas of the labor market where Hispanic workers are overrepresented did experience significant gains in September, noted William Spriggs, chief economist of the AFL-CIO. Those sectors included leisure and hospitality and construction where payrolls were up 83,000 and 19,000, respectively.

But those numbers don’t come without their downsides, he said.

“This is disturbing because it means Hispanic workers are finding great difficulty moving out of their pockets and the big story of this recovery has been the success of women and Black workers to move out of the trap of just being in low-wage industries,” he said.

Fluctuations in the employment market tend to show up among Black and Hispanic workers first, Spriggs said, noting that unemployment among Black workers ticked down and labor force participation rose after two months of a concerning trend of rising unemployment and declining participation.

“The good news for Black workers is in many ways wiped out for Hispanic workers,” he said.

To be sure, Valerie Wilson, director of the Economic Policy Institute’s program on race, ethnicity and the economy, said individuals should hold off on drawing firm conclusions from one month of data.

Fluctuations are common in monthly reports and require several consecutive periods of a similar move before one can deduce a trend.

“It’s still hard to understand whether we’re just seeing volatility in the series because it’s a smaller sample size,” Wilson said.

— CNBC’s Gabriel Cortes contributed reporting.

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The Go! Go! Curry restaurant has a sign in the window reading “We Are Hiring” in Cambridge, Massachusetts, July 8, 2022.
Brian Snyder | Reuters

September’s jobs report provided both assurance that the jobs market remains strong and that the Federal Reserve will have to do more to slow it down.

The 263,000 gain in nonfarm payrolls was just below analyst expectations and the slowest monthly gain in nearly a year and a half.

But a surprising drop in the unemployment late and another boost in worker wages sent a clear message to markets that more giant interest rate hikes are on the way.

“Low unemployment used to feel so good. Everybody who seems to want a job is getting a job,” said Ron Hetrick, senior economist at labor force data provider Lightcast. “But we’ve been getting into a situation where our low unemployment rate has absolutely been a significant driver of our inflation.”

Indeed, average hourly earnings rose 5% on a year-over-year basis in September, down slightly from the 5.2% pace in August but still indicative of an economy where the cost of living is surging. Hourly earnings rose 0.3% on a monthly basis, the same as in August.

No ‘green light’ for a Fed change

Fed officials have pointed to a historically tight labor market as a byproduct of economic conditions that have pushed inflation readings to near the highest point since the early 1980s. A series of central bank rate increases has been aimed at reducing demand and thus loosening up a labor market where there are still 1.7 open jobs for every available worker.

Friday’s nonfarm payrolls report only reinforced that the conditions behind inflation are persisting.

To financial markets, that meant the near certainty that the Fed will approve a fourth consecutive 0.75 percentage point interest rate hike when it meets again in early November. This will be the last jobs report policymakers will see before the Nov. 1-2 Federal Open Market Committee meeting.

“Anyone looking for a reprieve that might give the Fed the green light to start to telegraph a pivot didn’t get it from this report,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Maybe the light got a little greener that they can step back from” two more 0.75 percentage point increases and only one more, Sonders said.

In a speech Thursday, Fed Governor Christopher Waller sent up a preemptive flare that Friday’s report would do little to dissuade his view on inflation.

“In my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand,” Waller said.

Markets do, however, expect that November probably will be the last three-quarter point rate hike.

Futures pricing Friday pointed to an 82% chance of a 0.75-point move in November, then a 0.5-point increase in December followed by another 0.25-point move in February that would take the fed funds rate to a range of 4.5%4.75%, according to CME Group data.

What concerns investors more than anything now is whether the Fed can do all that without dragging the economy into a deep, prolonged recession.

Pessimism on the Street

September’s payroll gains brought some hope that the labor market could be strong enough to withstand monetary tightening matched only when former Fed Chairman Paul Volcker slew inflation in the early 1980s with a fund rate that topped out just above 19% in early 1981.

“It could add to the story of that soft landing that for a while seemed fairly elusive,” said Jeffrey Roach, chief economist at LPL Financial. “That soft landing could still be in the cards if the Fed doesn’t break anything.”

Investors, though, were concerned enough over the prospects of a “break” that they sent the Dow Jones Industrial Average down more than 500 points by noon Friday.

Commentary around Wall Street centered on the uncertainty of the road ahead:

  • From KPMG senior economist Ken Kim: “Typically, in most other economic cycles, we’d be very happy with such a solid report, especially coming from the labor market side. But this just speaks volumes about the upside-down world that we’re in, because the strength of the unemployment report keeps the pressure on the Fed to continue with their rate increases going forward.”
  • Rick Rieder, BlackRock’s chief investment officer of global fixed income, joked about the Fed banning resume software in an effort to cool job hunters: “The Fed should throw another 75-bps rate hike into this mix at its next meeting … consequently pressing financial conditions tighter along the way … We wonder whether it will actually take banning resume software as a last-ditch effort to hit the target, but while that won’t happen, we wonder whether, and when, significant unemployment increases will happen as well.”
  • David Donabedian, CIO at CIBC Private Wealth: “We expect the pressure on the Fed to remain high, with continued monetary tightening well into 2023. The Fed is not done tightening the screws on the economy, creating persistent headwinds for the equity market.”
  • Ron Temple, head of U.S. equity at Lazard Asset Management: “While job growth is slowing, the US economy remains far too hot for the Fed to achieve its inflation target. The path to a soft landing keeps getting more challenging. If there are any doves left on the FOMC, today’s report might have further thinned their ranks.”

The employment data left the third-quarter economic picture looking stronger.

The Atlanta Fed’s GDPNow tracker put growth for the quarter at 2.9%, a reprieve after the economy saw consecutive negative readings in the first two quarters of the year, meeting the technical definition of recession.

However, the Atlanta Fed’s wage tracker shows worker pay growing at a 6.9% annual pace through August, even faster than the Bureau of Labor Statistics numbers. The Fed tracker uses Census rather than BLS data to inform its calculations and is generally more closely followed by central bank policymakers.

It all makes the inflation fight look ongoing, even with a slowdown in payroll growth.

“There is an interpretation of today’s data as supporting a soft landing – job openings are falling and the unemployment rate is staying low,” wrote Citigroup economist Andrew Hollenhorst, “but we continue to see the most likely outcome as persistently strong wage and price inflation that the Fed will drive the economy into at least a mild recession to bring down inflation.”

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