Pressure Mounting for Another Fed Cut
Pressure Mounting for Another Fed Cut
News from or about the Federal Reserve Board last week was sparse on the ground as U.S. equity markets were rocked by increasing data-based concerns about a potential slowdown or recession in the U.S. Just below that was investor fear about the ongoing possibility of an impeachment inquiry into President Donald Trump. For more see pages 1 and 10.
Some data wasn’t encouraging and some was. Friday, the Labor Dept. said the economy added 136,000 jobs in September and the unemployment rate dropped to 3.5% from 3.7% in August, marking the lowest rate since December 1969
Earlier in the week, the Institute for Supply Management reported its manufacturing index fell to 47.8 in September, the lowest level since June 2009, from 49.1 the prior month. Readings below 50 indicate contraction, while those above signify expansion.
Yet, regular readers might remember that we’ve been noting for some time now that this could happen in the fall. Tom Lee has said for many months now that a sub-48 print in ISM by September was probable. Again, the nine months change of U.S. Treasury 30-year-10-year yield curve has a remarkable track record of leading ISM by 16 months. We expect the ISM to rebound sharply in 2020. For more on this, see page 3.
Taken together, these two conflicting data points summarize the conundrum that the Fed faces. Is the U.S. economy weak enough for more cuts or not?
With the market down sharply last week, the pressure on the Fed’s FOMC to cut rates again has just been turned up to 11, as Nigel of the film “Spinal Tap” might say. Fed Chairman Jerome Powell has made noises about rate changes following the data and now he may have to cut again at the end of this month, even if past statements seemed to make that seem unlikely.
Right on cue last week, President Trump blamed the Fed for the worsening U.S. factory numbers. He again urged the Fed to reduce rates more aggressively than it has.
Separately, the New York Fed continues to be busy injecting hundreds of billions into the financial system through operations in the repo market. The Fed has said it would continue to offer loans in the repo market through Oct. 10.
Trade talks between the U.S. and China, meanwhile, are expected to resume next week in Washington. Investors have been particularly sensitive to trade headlines—and any related tweets from President Trump—in recent weeks.
The U.S. Treasury 10-yr note yield ended Friday around 1.52% versus 1.68% the previous week. The CME Fed futures market soared, showing a 80% probability of another 25-bps rate cut at the next FOMC meeting, up from over 45% one week ago.
Upcoming: 10/30-31 - FOMC meeting. It’s starting to look interesting.
