Employment Data Points to a Still Robust US Labor Market, Supporting Higher for Longer Narrative

Economic

Summary:

Non-farm payrolls surprised dramatically to the upside for September, but wage gains are fading.

Non-farm payrolls surprised dramatically to the upside for September, but wage gains are fading

USD: Markets and economists had been anticipating a deceleration of employment from the previously reported 187K in August, instead the actual figure was nearly double the consensus estimate at 336K, with substantial positive revisions to July and August totaling 119K meaning the three-month moving average is now 266k. Private employment growth increased a robust 263K and government employment added 73K. In the private sector, the strength was predominantly still in the service industry with 96K jobs added in leisure and hospitality and another robust 66K jobs added in private health care.

USD: On the other hand, hourly earnings gains are quickly moving back to pre-pandemic norms. Hours worked declined slightly over the year, likely reflecting the shift towards the service sector where hours tend to be shorter, but it coupled with the wage data to show that the rapid gains in worker nominal earnings are fading quickly, increasing the safety from a wage price spiral situation. Even the strong employment gain was not enough to drive an acceleration in aggregate weekly payrolls, which slowed to 5.6% year-to-year from 9.3% the year prior. So while employment is still very strong, the wage gains are fading rapidly even without mass layoffs.

Evidence of labor market strength can also be seen in JOLTS jobs openings, ISM PMI employment subindex, and initial claims.

USD: US JOLTS openings for August rose to 9.6 million. This reading followed 8.9 million (revised from 8.8 million) openings in July and surpassed the market expectation of 8.8 million. Over the month, the number of hires and total separations changed little at 5.9 million and 5.7 million, respectively. Within separations, quits (3.6 million) and layoffs and discharges (1.7 million) changed little. The quits rate was unchanged at 2.3% in August, a level in line with typical pre-pandemic levels and well off the highs of around 3% in 2021/22.

USD: ISM Services PMI registered 53.6 percent in September, 0.9 percentage point lower than August’s reading of 54.5. The Prices Index registered 58.9 percent in September, matching its August reading. The employment index fell to 53.4 from 54.7. ISM manufacturing PMI surprised to the upside in September increasing to 49.0 in September from 47.6 in August. Almost all key subcomponents increased, with the employment index increased for the second month in a row to 51.2 from 48.5.

USD: Initial jobless claims increased only modestly to 207k from 205k during the week of September 30th, closely in line with expectations. The 4-week moving average declined by 2.5k. Continuing jobless claims declined to 1664k from 1665k during the week of September 23rd, close to expectations. The 4-week moving average declined by 5k.

Strong Canadian employment data suggests potentially one more rate hike and CAD resilience in the medium term

Strong employment and wage growth could lead to more rate hike.

CAD: Canada's employment rose by 63.8k jobs in September, surpassing consensus expectations at 20k and Citi's high forecast at 55k. Full time employment rose by 15.8k jobs while part time employment rose by 47.9k. Goods sectors lost 10.5k jobs while services sectors added 74.3k jobs. The unemployment rate remained at 5.5% in September with the participation rate ticking up slightly to 65.6%. Average hourly wages of permanent employees rose 5.3%YoY, up from 5.2% in August. Not only has wage growth stayed above the 4-5% range the BoC has continually cited as too-strong to be consistent with 2% inflation, wage picked up somewhat further in September.

CAD: Recently, the trend of aggregate hours worked in employment data has outpaced output growth. This could suggest either a pick up in activity in Q3 or very weak productivity. Both would be somewhat concerning for the BoC assessing upside risks to inflation. Weak productivity would suggest increased wage costs will be passed through to higher prices.

CAD: Strong employment in September was partly due to seasonal adjustment issues. Similar patterns to 2022 data have repeated this year, with weaker employment over the summer months which then rebounds into the fall. This is particularly evident in education employment, which has dropped in August the last two years and bounced-back in September. Employment in the education sector accounted for the majority of the job growth in September with 65.8k jobs added.

CAD: The rise in the unemployment rate from 5.0% earlier this year to 5.5% currently has been the clearest sign of a loosening labor market recently, although this looks to have possibly stalled. Strong immigration has likely been a factor in some loosening, but can keep monthly employment figures strong. Most importantly, wage growth is not consistent with a loosening labor market and could have the BoC adjusting policy again sooner rather than later.

Week Ahead: US CPI MoM, PPI Final Demand MoM, U of Mich Sentiment, ECB Minutes, Euro Area Households Inflations Expectations, UK GDP and KPMG RECs survey August GDP Data, China September CPI, Exports, Total Social Financing

US: CPI, PPI, UMichigan Sentiment.

USD: CPI MoM – Citi: 0.3%, median: 0.3%, prior: 0.6%; CPI YoY – Citi: 3.6%, median: 3.6%, prior: 3.7%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 4.1%, median: 4.1%, prior: 4.3%; Core CPI should rise 0.32%MoM in September, a strong increase that rounds to 0.3% but with risks of a print that rounds to 0.4%. One notable difference in our forecast compared to August data is a pick-up in shelter prices. Citi Research expect primary rents to slow somewhat to 0.44% from 0.48% in August but owners' equivalent rent to pick up to 0.41% from 0.38%. The risk is that these shelter prices continue slowing, as they still should ease further over the coming months. But the stronger element of shelter prices in September should be a sharp rebound in hotel prices, with a 3.5% increase in lodging away from home incorporated in our forecasts and with upside risks. Hotel prices typically fall by around 3% in September in non-seasonally adjusted terms, but weekly data instead revealed a slight increase on average this year. This implies a large seasonally adjusted jump in this component, with upside risks, after a few months of declines. Other travel services prices should also be strong, with a 4% increase in airfares as jet fuel prices rise and demand for domestic travel could increase into the holiday season.

Overall, Citi Research expect a strong 0.45%MoM increase in core services prices excluding shelter, which would be even stronger including hotel prices (a more comparable measure to core PCE services excluding housing). Headline CPI should also rise a similar 0.33%MoM and 3.6%YoY. Energy prices should continue to rise, although more modestly than in August in seasonally adjusted terms. Restaurant prices will be a particularly important component of headline CPI, as these prices will be included in core PCE inflation.

USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.3%, prior: 0.7%; PPI Final Demand YoY – Citi: 1.8%, median: NA, prior: 1.6%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 2.2%, median: NA, prior: 2.2%; PPI ex Food, Energy, Trade MoM – Citi: 0.3%, median: 0.2%, prior: 0.3%; PPI ex Food, Energy, Trade YoY – Citi: 3.1%, median: NA, prior: 3.0%, Citi Research expect a 0.4%MoM increase in PPI final demand, although with upside risks from rising energy prices, and a 0.3% increase in core PPI that excludes food, energy, and trade services prices.

Trends in producer prices have been somewhat leading consumer prices over the last few years, both when supply chain disruptions and shortages led to rising prices and when the correction of supply issues and lower energy costs led to falling prices. Over the last few months, stronger PPI has captured rising energy prices but also the possible end of disinflationary pressure from supply chains correcting. As supply has normalized and energy prices increased, transportation and warehousing prices have risen again, and Citi Research would continue to look to PPI data for upside to goods prices.

USD: U of Mich Sentiment – Citi: 66.2, median: NA, prior: 68.1; 1y Inflation Expectations – Citi: 3.4%, median: NA, prior: 3.2%; 5-10y Inflation Expectations – Citi: 2.9%, median: NA, prior: 2.8%; While still well above the lows of last summer, consumer sentiment has been declining in the last couple of months as energy prices started rising. Citi Research expect another modest decline in the October preliminary release to 66.2 from 68.1.

The most important part of the report will be inflation expectations. Citi Research were somewhat surprised by the decline in inflation expectations in September considering that energy prices remained elevated compared to most of this year. Citi Research expect a rebound in 1y inflation expectations to 3.4% from 3.2% in the October preliminary report. While this level would be well-off the highs of this year it’s still somewhat more elevated than the typical pre-pandemic expectations. Similarly, Citi Research also expect a modest increase in the 5-10y inflation expectations to 2.9% from 2.8%.

Euro area and UK: ECB minutes, euro area household inflation expectations and UK GDP and KPMG-RECs survey

EUR: ECB minutes: the minutes of the September are likely to be staler than usual given average Euro Area 10-year sovereign yields have risen by 25bp since the September meeting. PEPP reinvestments (and likely reserve remuneration) were not discussed at the meeting according to President Lagarde, setting our focus on trust in the staff projections and the balance of risks around them.

EUR: Euro Area Households Inflation expectations: Household inflation expectations, both 1-year ahead and 3-year ahead, have been correcting lower since the start of the year, but have recently stabilized at levels above pre-energy shock, probably on higher fuel prices. Citi Research expect a similar dynamic to have occurred in the August survey (when fuel prices accelerated further).

GBP: UK: GDP and KPMG-RECs in focus: A busy week for the UK next week with the Labour Party conference, a raft of MPC speakers and some not unimportant data all on the agenda. In terms of data, the focus will be on the KPMG-RECs survey released on Wednesday, which Citi Research expect to show the UK labour market continuing to loosen. Second will be August GDP data – where the question is how far activity can rebound after a subdued July. Elsewhere, Credit conditions for Q3 as well as the RICS survey will be worth watching closely – with the latter likely to remain consistent with an ongoing downturn. For the MPC, attention will be focused on those comments from Bailey and Pill, with Broadbent last week casting a somewhat dovish tone.

China: CPI, PPI, trade balance, total social financing

CNH: CPI September – Citi Forecast: 0.2%YoY, Previous: 0.1%YoY; PPI September – Citi Forecast: -2.4%YoY, Previous: -3.0%YoY. For CPI, food inflation could be less strong with pork prices almost flat. The momentum of services price could depend on the Golden Week travel boom – Citi Research are still waiting for the numbers to confirm its strength and if there is any improvement in average spending. PPI deflation could continue to narrow as indicated by the price breakdown of the Mfg PMI survey. International oil prices did help, and the NDRC also raised domestic prices in September.

CNH: Exports September – Citi Forecast: -7.0%YoY, Previous: -8.8%YoY; Imports September – Citi Forecast: -5.8%YoY, Previous: -7.3%YoY; Trade Balance September (USD $Bn) - Citi Forecast: 74.0, Previous: 68.2; PMI’s new export order sub-index picked up by 1.1 ppt to 47.8 in September. The US Mfg PMI continued to rise in September, while EU’s remained stable. Global trade activities, represented by the Baltic Dry Index, saw a notable improvement in September. As a leading index, Korea's export growth rose by around 4 ppt to -4.4% in the same month. Favorable base effects will also impact exports. The PMI’s import sub-index in September retreated, but commodities prices such as iron ore and oil have risen. Coupled with the gradual recovery in domestic demand, Citi Research expect import growth to also improve.

CNH: Total Social Financing September (RMB bn) – Citi Forecast: 3200, Previous: 3124; New RMB loans (RMB bn) – Citi Forecast: 2000, Previous: 1358; M1- Citi Forecast: 2.3%YoY, Previous: 2.2%YoY; M2- Citi Forecast: 10.5%YoY, Previous: 10.6%YoY; New RMB loans could hit RMB2,000bn and new TSF could stand at RMB3,200bn with government bond issuance. The key focus should be on whether credit demand picks up following recent policy measures. For corporate, long-term loans should be a point to watch – with bottoming exports and profit improvement, the number should rise again. For households, early mortgage repayment should end with the long-waited mortgage repricing. The latest property easing may still take some time to show up in data.

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Michelle

Economic

Central Bank

The Fed's target policy rate has been raised to the 5.25%-5.50% range from near zero in March of 2022, and inflation measured by the Fed's preferred personal consumption expenditures price index (PCE) was 3.5% in August, compared to a peak of 7% last summer.

Fed Chair Jerome Powell has said the pieces of the low-inflation "puzzle" may be aligning, but he does not trust it yet.

Here is a guide to some of the numbers shaping the policy debate:

EMPLOYMENT (Released Oct. 6, next release Nov. 3):

Job growth in September blew past expectations in a confounding turn for Fed officials who thought the labor market had started to cool, likely stiffening the case for an additional rate increase. Employers added 336,000 jobs last month, nearly double what economists polled by Reuters had expected. Revisions to prior months tacked on an additional 119,000 jobs added to the July and August totals, upending a trend Fed officials said was a sign of a labor market coming back into balance. The unemployment rate remained steady at 3.8%.

Hourly wages grew at a still brisk 4.2% on a year-over-year basis, though the month-to-month change of 0.2% was more contained.

JOB OPENINGS: (Released Oct. 3, next release Nov. 1)

Powell keeps a close eye on the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings for each person without a job but looking for one. That key ratio clung to its downward trend in August as the Fed's rate hikes have slowed labor market demand. It's now about 1.5-to-1, compared with the nearly two jobs for every person seeking work during most of 2022. Levels around 1.2 were considered tight for the U.S. labor market before the coronavirus pandemic.

INFLATION (Released Sept. 29, next release Oct. 12):

A key inflation measure fell in August, adding to what many economists feel is likely to be a steady disinflation. The PCE price index, stripped of volatile food and energy costs, rose 3.9% on a year-over-year basis compared to 4.3% in July, and recent month-to-month increases have averaged close to the Fed's 2% target. The headline rate did increase slightly, from 3.4% to 3.5%, but largely on the basis of energy costs. The Fed uses the PCE measures to set its inflation target, but the decline in the "core" measure will be seen as evidence of slower price increases ahead.

Consumer price inflation rose for a second straight month, to 3.7% in August versus 3.2% in July. But the rise was largely the result of higher gas prices, which can be volatile and which Fed officials discount in analyzing price trends. More important to the central bank, underlying "core" inflation stripped of energy and food costs continued its decline, falling to 4.3% on a year-over-year basis compared to 4.7% in July.

While the overall picture is somewhat mixed, the inflation data in recent months likely doesn't change the policy outlook. But it does highlight the time it may take for Fed officials to be confident in a continued inflation decline.

INFLATION EXPECTATIONS (Released Sept. 29, next release Oct. 13)

Consumers' estimates of what inflation will average over the next 12 months and the next five years fell notably in September, the University of Michigan reported. At the one-year horizon, the inflation expectation fell to 3.2% from 3.5% in August. At five years, the reading fell to 2.8% from 3.0%.

The declines will be comforting to Fed officials who worry that rising inflation expectations can make consumers act in ways that will keep actual inflation higher. The one-year rate, notably, is now around its 40-year average.

RETAIL SALES (Released Sept. 14, next release Oct. 17):

Retail sales rose more than expected in August, increasing 0.6%. While that was largely due to higher gasoline prices, a separate measure of sales more directly related to economic output also rose slightly even though economists expected it to decline. Even as prior months' sales were revised lower, the August report showed household spending likely still adding to overall economic growth that has been on the central bank's radar as an inflationary risk.

PRODUCER PRICES (Released Sept. 14, next release Oct. 11)

The producer price index (PPI) for August jumped 0.7%, the largest monthly increase since the peak of the Fed's inflation worries in June of 2022. Goods prices spiked a full 2%, another reason the central bank will be reluctant to declare its inflation battle over. Yet much of that was due to a jump in fuel prices, the sort of thing the Fed will discount. An index of service industry prices rose just 0.2%, and a measure of retailer and wholesaler margins fell, reinforcing arguments that inflation should continue to fall.

Source: REUTERS

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FOREX.com

Economic

Forex

Mainland Chinese markets are reopening after Gold Week holidays, having to navigate not only heightened geopolitical risks in the Middle East but also spiking bond yields in the United States which sapped demand for risk assets in elsewhere in the world during their closure. Ahead of key domestic data on inflation, international trade and credit demand during the week, the tricky macroeconomic backdrop will make for an interesting week for China's A50 share index along with USD/CNH in the FX space.

China A50 breaks below range support

Looking at the opening of mainland equity markets, the most notable technical development has been the breakdown of several bluechip indices, including China's A50 which has fallen through channel support for the first time since June, hitting a low of 12040 before bouncing ahead of the resumption of trade in underlying securities on Monday.

Given the range break, and with RSI confirming the downward bias, the path of least resistance appears lower right now unless the index can push back into its former range.

Traders may wish to sell rallies back towards 12360 targeting a move towards 12040 or even 11800, the low hit in November last year. A stop above 12400 would offer protection against a reversal, something that is a risk given poor near-term sentiment and positioning in Chinese assets among offshore investors.

For those waiting for more conclusive price action before entering a trade, a push back into the prior trading range would open the door for a potential retest of long-running downtrend resistance dating back several years. The trendline is currently located around 12940, having successfully repelled attempts to break higher twice this year.

China A50, USD/CNH: Weakening Trend in Focus Ahead of Key Economic Data_1

CNH resilient to latest bout of USD strength

Outside equities, the price action in USD/CNH has been far more resilient, largely reflecting constant moves from the People's Bank of China (PBOC) to push back against US dollar strength, mirroring similar measures being taken by Japanese policymakers to support the JPY against the USD.

One look at USD/CNH on the daily tells you the pair has struggled on probes above 7.3300 for much of this year, solidifying this area as a significant resistance zone having seen off a prior wave of USD strength in 2022. With the PBOC continuing to take action to support the onshore USD/CNY rate through fixing the midpoint for daily trade far stronger than what the prior day's close would imply, it may require a significant strengthening in the USD to deliver fresh highs for USD/CNH.

Given the potential stalemate as USD strength is counteracted by PBOC support, range trading appears the most likely outcome near-term. There are multiple resistance layers located starting from 7.33170 while key downside levels to watch include 7.2700, 7.2400 and 7.1160, the low set in July this year.

China A50, USD/CNH: Weakening Trend in Focus Ahead of Key Economic Data_2

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Goldman Sachs

Economic

Goldman Sachs Research finds that even though there are some key similarities between the two situations, China's “Japanification” is far from certain.

While deteriorating demographics, a debt overhang, and an asset-bubble-burst were all important ingredients to Japan's malaise at the turn of the century, a key contributor to its Japanification was a fundamental change in longer-term growth expectations, Goldman Sachs Research China Economist Hui Shan writes in the team's report. She says growth expectations in China, which is also coping with worsening demographics, a debt overhang, and a deflating property market, are showing signs of a downward drift, but there are ways policymakers can avoid a Japanese-style slump.

Is China's Economy Facing Japanification?_1

“The key to avoid such a negative feedback loop is to cut off the continued deterioration in longer-term growth expectations,” Shan says. She points out there are bright spots in the economy, including investment in electrical machinery in the manufacturing sector and an increase in making precession instruments and cars. Policymakers' will have to manage the outlook for GDP growth as the world's second-largest economy transitions from one of its important economic engines — property and infrastructure investment — to a new one based on upgraded manufacturing and self-reliance.

“During this process, growth is expected to be soft before the new engine reaches a scale that is comparable to the old engine,” Shan says. Inflation will probably be muted because of the unfavorable demand-supply balance, and nominal interest rates will need to stay low to facilitate the deleveraging of the old economy. “These are mild symptoms of Japanification that will stay with China for at least a few years in our view,” she adds.

How China compares to Japan in the mid-1990s

By some measures, China's situation looks even more dire than Japan's did some 30 years ago, according to Goldman Sachs Research. For starters, China's crude birth rate (the ratio between the number of live births in a year and the total mid-year population) has fallen further — it declined to 0.75% in 2022, considerably lower than Japan's 0.99% rate in 1990 — and medical experts believe it may not have bottomed yet.

Weakness in China's housing sector also looks more pronounced. The urban residential property vacancy rate is around 20% in China, more than double the 9% rate that Japan endured in 1990, and housing prices are more stretched at 20 times household income in China, versus 11 times in Japan in 1990. Given that residential investment represents about twice the share of China's GDP compared with Japan in 1990, “the direct impact from a housing slump to the real economy would be bigger in China than in Japan,” Shan says.

That said, there are ameliorating circumstances that suggest China may be able to avoid a prolonged downturn. China's property slump isn't being accentuated by a stock market collapse, as was the case for Japan in early 1990, when plunging share prices severely damaged its banking system. China will likely continue to enjoy steady population growth in its urban centers, due to its still-low urbanization rate, even as its overall population declines. And, with a significantly lower GDP per capita, China's economy also arguably has a higher potential growth rate than Japan in the 1990s, “which should make the deleveraging process less painful,” Shan says.

In addition, healthy Chinese companies, unlike firms in Japan in the 1990s, aren't reluctant to invest because their balance sheets are impaired, but rather because of regulatory tightening and policy unpredictability. Japanese banks were able to procrastinate in dealing with non-performing loans and provide forbearance lending to zombie companies.

“The Chinese government does not face the same political costs that the Japanese government did, but its preference for commercial banks to absorb a large share of losses in property and local government implicit debt may nonetheless constrain their credit creation ability,” Shan says.

The real reason for Japan's economic stagnation

Then there's the question of just how much of Japan's woes in the 1990s were tied directly to demographics. Businesses saw demographics exerting downward pressure on long-term growth expectations and pulled back on spending and increased saving, creating a negative feedback loop. In fact, most of the decline in Japan's potential growth rate in the 1990s can be explained by the falling contribution of investment on worsening growth expectations, Shan says. By contrast, labor's contribution played a relatively small role.

“Deteriorating long-term growth expectations rather than deteriorating demographics were at the core of ‘Japanification,'” she says.

Is China's Economy Facing Japanification?_2

The latest data coming out of China suggests expectations have weakened materially over the past 18 months. Private investment, for example, stopped increasing after early 2022 and contracted outright in 2023. Likewise, consumer confidence plummeted during the Shanghai lockdown in April 2022 and has stayed depressed since. “The lack of coordinated and forceful policy responses has led many forecasters to downgrade their medium-term growth outlook for China,” Shan says.

There are steps China can take to counter that pessimism, according to Goldman Sachs Research. The government could emphasize the importance of economic development, accelerate the restructuring of troubled property developers and local government financing vehicles, and strengthen social safety nets to encourage long run household consumption. They also caution that commercial banks shouldn't be made to shoulder most of the loan losses during property deleveraging to protect their ability to extend new credit, among other steps to provide greater policy certainty.

“Policy predictability and coordination are important for investment demand from the private sector,” Shan says. “The Chinese economy doesn't have to follow Japan's path in the 1990s.”

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Glendon

Political

Speaker Debacle Plunges US Politics Into Uncertainty_1

Kevin McCarthy has said he would not seek the speakership again after his removal

The next speaker of the United States House of Representatives will face a gruelling task: maintaining near unanimous support among a divided Republican caucus while reaching agreements with Democrats to fund the government.

Former Speaker Kevin McCarthy found out the hard way that the two jobs can be at odds with one another. When he struck a deal with Democrats to temporarily fund the government on Saturday, he sparked a Republican backlash that culminated in his removal from the speakership position.

The Republicans have a thin majority in the House, so the same small faction of conservatives — led by Congressman Matt Gaetz — that toppled McCarthy can also remove his eventual successor. That has instilled an atmosphere of uncertainty moving forward.

“There's a fear that they will just continue to do this to any speaker. And obviously, that creates a really chaotic environment where the House can't consider bills,” said Rachel Blum, a professor of political science at the University of Oklahoma.

With that threat hanging over the next speaker, experts say the House and the US government more broadly are facing the possibility of chronic dysfunction in the months ahead.

The removal

McCarthy, a California conservative, was removed in a 216-210 vote on Tuesday, with the entire Democratic caucus joining eight Republicans to remove him.

Now, House Republicans are privately deliberating to choose the next speaker, with Patrick McHenry serving as the acting leader of the chamber.

Jim Jordan, the chair of the House Judiciary Committee and former head of the right-wing Freedom Caucus, has announced his candidacy for the role. So has Steve Scalise, the House majority leader.

Whoever wins will need to appease Gaetz and his fellow disruptors in the Republican caucus while running a functioning chamber.

The government is divided: Democrats control the Senate and the White House, while Republicans are in charge of the House. Given that split, Congress is not expected to advance major legislation.

But the legislative branch — composed of both the House and the Senate — must pass a budget to fund the government. The recently approved stopgap funding bill that cost McCarthy his gavel will expire on November 17.

If lawmakers fail to approve further funding, the government will shut down, which would bring some agencies to a halt and cause disruptions in the pay of federal workers.

Another compromise to secure a government budget will be more difficult this time around, experts say.

“I can't see the next Republican speaker stepping into that role and taking from this McCarthy episode the lesson that he should continue to compromise,” Blum told Al Jazeera. “It seems that any speaker is going to have to put up a little bit more of a fight in order to maintain the speakership.”

Another issue at stake is Ukraine aid — a top priority for President Joe Biden's administration. Many right-wing Republicans are sceptical of providing more assistance and would likely use their leverage over the speaker to disrupt it.

The White House is seeking billions in additional aid to Kyiv. According to the Congressional Research Service, the US legislature has appropriated more than $113bn for Ukraine since the Russian invasion of the country began last year. It is not clear when those funds will run out.

Why did the Democrats let McCarthy fall?

With so much in the balance, some observers are questioning why the Democrats did not bail out McCarthy in his hour of need.

While Gaetz is largely credited with toppling McCarthy, the overwhelming majority of the votes against him came from Democrats.

Every single Democrat present for the vote backed Gaetz's motion to vacate the speaker's chair. A handful of Democratic votes would have allowed McCarthy to keep the speaker's gavel.

Adam Cayton, a political science professor at the University of West Florida, said that if the Democrats had voted to save McCarthy, the move would have been unprecedented.

Cayton explained that while McCarthy's removal is a first in US history, having a minority-backed speaker would “also be really out of the ordinary”. He stressed that the House operates on majority rule.

“It also would have been unprecedented for the minority party to support a speaker of the other party, to let him stay in office in spite of not having the support of a majority of the chamber,” Cayton told Al Jazeera.

McCarthy had angered Democrats from the start of his tenure as speaker in January. Early on, he removed three Democratic lawmakers from their committees, including booting Representative Ilhan Omar from the foreign affairs panel.

And last month, he opened an impeachment inquiry against Biden over his son Hunter's business dealings, which the White House described as “extreme politics at its worst”.

Moreover, McCarthy ruled out negotiating with the Democrats to get their votes this week. “They haven't asked for anything. I'm not going to provide anything,” he told CNBC earlier this week.

In a statement before the vote, House Democratic Leader Hakeem Jeffries squarely blamed Republicans for the impasse, accusing them of empowering “right-wing extremists” and urging them to resolve their “civil war”.

Jeffries also explicitly invoked the impeachment push. “Rather than work with us to solve problems for everyday Americans, extremism continues to run rampant in the House of Representatives,” he said.

But Jennifer Nicoll Victor, a political science professor at George Mason University in Virginia, faulted the Democrats for siding against McCarthy. She felt the move was unwarranted, particularly if their motive was to rebuke McCarthy's antagonising conduct.

“If in fact, it was a sort of a petty, emotional or reactionary kind of response that, to me, seems anti-democratic, against good governance, against the best practices of how democracies are supposed to work,” Victor said.

“Political parties are supposed to respect their political opponents' rights to power in a democracy,” she explained. “Being spiteful about helping some extreme faction depose your political opponents — I think goes against the norms of democracy.”

Paths forward

Despite the grim outlook, a deadlock in the House is not inevitable. There are several scenarios where the chamber can do its job despite the political realities spelled out by McCarthy's removal.

Republican moderates and Democrats could form a bipartisan majority to pass legislation, but analysts say that would be unlikely given the political polarisation in the country.

It is also not a foregone conclusion that Gaetz and his allies will have it out for the next speaker the way they had McCarthy in their crosshairs. University of Oklahoma's Blum said Gaetz and his fellow rebels may back down after achieving the visibility and power they desire.

“One path forward is that the speaker can at least unite the Republican caucus, so they can agree and get things done,” she told Al Jazeera. “Or they could end up with another speaker who has to govern with support from Democrats.”

But for Victor, the likeliest outcome is that dysfunction will prevail, with the Gaetz faction feeling emboldened. Moderates may even rebel against a future far-right speaker.

“We'll probably just hobble through that way — whether that means they can't get the spending done and we have another shutdown, or if the debt ceiling becomes another issue at some point, or no new legislation gets done because they can't get their act together,” she said.

“It seems like a dysfunctional situation.”

The only silver lining, she added, is that this Congress's term will expire in a little more than a year. “So there is an endpoint.”

Source: AL JAZEERA

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Devin

Political

The Lessons From Hamas's Assault on Israel_1

It is hard to see past the shock of Hamas's bloodthirsty assault on Israel. That is because it involved thousands of rockets, and fighters attacking the south of the country by land, sea and air. And because it was completely unforeseen despite its scale, inflicting a humiliating blow against Israel's vaunted intelligence services. But most of all because of the killing of hundreds of innocent people and the taking of scores of hostages by Hamas. As the Israel Defence Forces (idf) ponder how to respond, the world's attention will be caught up in their desperate plight.

It is too soon to know how the next few weeks will unfold. Israel's prime minister, Binyamin Netanyahu, has vowed to exact “a huge price” and he is right: Hamas must be made to pay for its atrocities, which include the massacre of more than 250 young Israelis at a festival in the south. But Israel's response comes with grave risks. Sending idf ground troops into Gaza could draw them into bloody urban fighting—and endanger the hostages, too. The longer the fighting drags on, the greater the chance that violence spreads to the West Bank or Lebanon. The death of many civilians in Gaza, especially if seen as wanton, would harm Israel's standing in the world as well as being profoundly wrong in its own terms.

However, it is not too soon to be clear that this attack marks the end of a decades-old belief in Israel that Palestinian aspirations for sovereignty could be indefinitely put aside while the rest of the Middle East forged ahead. Whatever else emerges from this conflict, one thing will be a new search for answers to the question of how Israelis and Palestinians can live in peace.

Mr Netanyahu's policy of sidelining the Palestinians depended on three calculations, each of which has been thrown up into the air by the Hamas assault. The first is that, even if the Palestinian question was left to rot, Israelis could remain safe. As a result of the terrible casualties of the second intifada, which finished in 2005, Israel shut Palestinian populations away behind security walls. Superior intelligence and overwhelming firepower, including the Iron Dome anti-rocket system, meant that the armed threat from Palestinian fighters was manageable.

That notion now looks broken. One reason the intelligence services may have been distracted from Gaza is that the West Bank has been thrown into disarray by the expansionist aims of Israel's far right. In southern Lebanon Hizbullah has a fearsome arsenal, much of it supplied by Iran. No doubt, Israel will be able to re-establish its military dominance over the Palestinians. But even if its soldiers and spies believe that this ensures Israeli citizens are protected, voters themselves are unlikely to conclude that a return to the status quo is good enough.

The second assumption was that the existence of Hamas helps Israel deal with Fatah, the Palestinian party that runs the West Bank. It was assumed that divide-and-rule kept the Palestinians weak and that the influence of radical factions would undermine the credibility of moderates as partners for peace—all of which suited Mr Netanyahu just fine.

With these attacks, that notion has also run its course. One reason for Hamas to strike was that divide-and-rule has created the conditions in which Fatah has become decadent and out of touch; its leader, Mahmoud Abbas, is ailing. With this assault, Hamas is claiming to be the true voice of Palestinian resistance. Inter-Palestinian rivalry was supposed to protect Israelis; it has ended up making them targets.

The third assumption was that Israel could strengthen its position in the Middle East by pursuing regional diplomacy even as it left the Palestinians to fester. That view was endorsed by the signing of the Abraham Accords between Bahrain, Israel and the United Arab Emirates in 2020—and the addition of Morocco and Sudan later. Until this weekend, it had looked as if Saudi Arabia might join, too. Eventually, it still may, but Hamas has shown that the Palestinians have a say, too.

The coming operation against Hamas will only add to the sense that the time has come for a new approach. After Saturday's bloodshed, Israel cannot wreck Hamas only for it to remain in power in Gaza as if nothing had happened.

However, no simple alternative is on offer. The idf does not want to occupy Gaza—that is why the enclave is self-governed. The idea of an international peace-keeping force is also hard to imagine: no country wants to take on the responsibility. And yet, if the idf destroyed Hamas in Gaza and then marched back home again, who knows what destructive forces might fill the vacuum that was left behind.

Nobody should underestimate the difficulties that lie ahead. The second intifada turned young Israelis against talking to the Palestinians. This outrage will surely create a new generation of Israelis who cannot imagine how Palestinian factions could be a partner for peace. At the same time, Israel's right-wing coalition has been focused on annexing parts of the West Bank. It will redouble these efforts.

Despite that, hard-headed Israelis will need to grapple with the fact that they must once again start to deal with the Palestinian issue. Israel's security apparatus needs a counterparty to work with if it is to have any sway over the Palestinian territories. That means it needs a Palestinian interlocutor.

What comes next will depend greatly on who is in power in Jerusalem. For the moment, Israel is pulling together, but it will soon undergo a bitter reckoning that could yet lead to a new coalition, or even a new prime minister. If Israelis are to be safe, whoever is in charge will need to stop thinking of the Palestinians as a problem that can be shelved and start thinking of them as a people who must be engaged.

Source: Economist

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WELLS FARGO

Economic

Nonfarm payrolls grew at a robust 336K pace in the month, and upward revisions to job growth in July and August further flattered the employment figures. Job growth was driven by both public and private hiring and a diverse set of industries. The labor force continued to grow, helping to restrain wage growth. Average hourly earnings grew just 0.2% for the second month in a row, bringing the year-over-year pace down to 4.2%, the slowest pace in more than two years and about a percentage point above where it was before the pandemic.

Report drove yet another increase in Treasury yields and fanned the flames that the FOMC may hike the federal funds rate one more time at one of its two remaining meetings of the year. Another rate hike before the end of the year is a possibility, but for now our base case remains that the last rate hike of the tightening cycle occurred in July. Next week's CPI report and the Q3 Employment Cost Index to be released on October 31 will help the FOMC determine if progress is continuing in its inflation fight despite the surprising strength in employment gains in recent months.

Jobs Market Still Flying High

U.S. job growth blew past expectations in September, rising by 336K compared to consensus expectations for a 170K gain. Revisions to the previous two months increased employment by an additional 119K. Not only was aggregate job growth impressively strong, but employment gains were broad-based across most industries. The employment diffusion index, a measure of hiring breadth across industries, jumped to 64.2, the highest reading since January. Leading the charge were leisure & hospitality (+96K) and government (+73K), two industries where payrolls are quickly closing in on their pre-COVID levels. Health care (+41K), professional, scientific & technical services (+29K) and manufacturing (+17K) also posted notable gains.

Despite all the headlines about strikes in recent weeks, labor disputes had little bearing on the change in nonfarm payrolls in September. The UAW walkouts and Hollywood writers' deal both occurred too late in the month to be reflected, although the net conclusion of a handful of smaller strikes gave a small (~4K) boost to payrolls.

A marked increase in labor supply over the past year has helped to support overall hiring. An additional 90K workers entered the labor force in September on the heels of what was already a major swell in August. The labor force participation rate was unchanged at 62.8%, continuing its now 11-month streak of avoiding a decline despite the headwinds caused by an aging population. Prime-age women have led the charge, although men ages 25-54 have also seen participation rebound strongly. Participation among older workers also has edged higher over the past year (chart). We see scope for labor force growth to remain solid in the near-term as the still-strong jobs market pulls in workers and deteriorating finances give other workers a push. September's moderate rise in the labor force roughly matched the increase in the household survey's measure of employment (86K). As a result, the unemployment rate was unchanged at 3.8%.

The more abundant supply of workers along with a less frenzied pace of hiring is helping to dampen wage pressures. Average hourly earnings came in a touch softer than expected, up 0.2% in September. On a year-ago basis, average hourly earnings have risen 4.2%—the slowest pace in more than two years—while the 3.4% annualized growth in AHE the past three months suggests a further drop in the year-over-year number is coming. While labor cost growth still needs to subside somewhat further to be consistent with 2% inflation over time, the moderation is a welcome step in the right direction for the inflation-fighting Fed. While the typical worker may be experiencing a slower pace of wage growth, the still-solid rate of hiring suggests growth in aggregate income derived from the labor market continues on at a decent clip, which should support overall consumer spending (chart).

After Employment, FOMC Watching CPI, ECI Closely

Resoundingly strong employment report will likely keep the FOMC on guard as it watches for signs that a tight labor market could prevent inflation from returning to 2% on a sustained basis. Another rate hike before the end of the year is a possibility, but for now our base case remains that the last rate hike of the tightening cycle occurred in July. Core inflation continues to grind lower, and we expect another relatively tame reading in next week's CPI report. In addition, robust labor supply growth has helped restrain labor cost growth, as indicated by the softness in average hourly earnings. The earnings data from the employment report are a somewhat crude measure of wages, so the Employment Cost Index (ECI) to be released on October 31 will be critical to confirming that labor costs are indeed decelerating. If the CPI and ECI data cooperate, we would expect the FOMC to remain on hold at its upcoming November 1 meeting.

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