Market to Fed: “See You in September. Counting the Hours…”
Market to Fed: “See You in September. Counting the Hours…”
Just a week past the previous Federal Open Markets Committee (FOMC) meeting and the countdown to the next one (September 17-18) has begun in earnest. Already various Fed policymakers are out there, some making public hawkish rate comments, others dovish. Call it an intravenous rate news drip feed for investors. I don’t know if it is haphazard or simply on purpose, to keep investors guessing.
September’s FOMC meeting will be particularly interesting because Fed Chairman Jerome Powell might have painted himself into a corner. He is on the record as noting the previous 25 basis points reduction, which took the Fed funds target rate down to 2.00%-2.25%, is a kind of mid-cycle adjustment. "Let me be clear,” he noted after the FOMC meeting. “What I said was it’s not the beginning of a long series of rate cuts." These are words the Fed chairman might be forced to eat.
The market begs to differ. Me? I watch the CME Fed Futures market closely. It has yet to fail me. Currently, it’s positively Trumpian in outlook. Despite the chairman’s stance, the Fed futures trading is adamant. The Fed is cutting in September. 100% probability.
Now I would never make a 100% probability of anything except that I’ll eat chocolate put in front of me. Nevertheless, as this column has noted previously, the futures market has so far ruled. That is to say, I have found this market often correct when it comes to the short term direction of the next FOMC meeting, better than the Fed itself.
Meanwhile, President Donald Trump, who got part of his wish, the rate cut, hasn’t let up in his criticism of the Fed. He wants more and that puts Powell back in the bind he was in before, which is trying to maintain the Fed’s independence even while the Administration raises tariffs, which could drive down growth. Never one to do things by halves, Trump wants’ “bigger and faster” rate cuts.
Even the economists seem to agree with the futures market. A recent survey by The Wall Street Journal showed that private sector economic forecasters see a 64% chance of a rate cut at the Sept. 17-18 FOMC meeting, up from 50% on month ago. They also see a higher probability, 34%, of a recession in twelve months, compared to 30% in July.
Separately, the idea of negative rates for U.S. Treasuries gained some currency in recent days. It seems incredible, but then many of the world’s developed nations already are afflicted with them. The entire German curve from short to long is now negative. Folks are paying to have the government hold their money. Crazy.
As low as the UST yields are, they are still much higher than competing bonds at other developed nations and the dollar, of course, is a stable currency so the carry trade is there and will until the US hits negative rates. Heck. Even if US rates go negative, they might still be higher than Germany’s.
I do think that as long as there is no convincing evidence of a recession, the bond market move simply makes stocks more attractive, something my colleague Tom Lee has been saying for a while. (See page 3.)
The 10-year Treasury note yield ended Friday at 1.74% versus 1.87% the previous week. At one point it touched 1.59%, not far above the previous low of 1.37 right after the Brexit vote 3 years ago.
Upcoming: 9/17-18 - FOMC meeting. That’ll be fun.
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