If the Fed is intent on taking a pause after the third rate cut in what policymakers have been keen to characterize as a “mid-cycle adjustment”, the October meeting might be a good time to convey that intention.
After a rocky start to the month, a calm settled in following progress on trade and movement on Brexit, which collided with lopsided positioning to trigger a rally that pushed US stocks back to the highs, and equity volatility back to levels seen prior to the August turmoil.
And it’s not just in equities. “Waning activity in eurodollar futures suggests traders are more inclined to embrace the stability in rates for now [and] Fed fund futures have trimmed the odds of a December move from a near certainty to 32%”, Bloomberg notes.
Meanwhile, yields are stuck in a range and the curve has re-steepened, with the 2s10s back out to 17bps on Friday, the widest since July.
And yet, depending on how this week goes on the data front, any plans on the part of the Fed to telegraph a pause could be derailed immediately, as a wave of critical numbers comes cascading in. Over the next five sessions, market participants will be bombarded with the first read on Q3 GDP, ISM and the October jobs report.
The latest read on Trump’s decelerating MAGA “miracle” is expected to show the US economy grew just 1.6% last quarter, the slowest in 2019, and just over half of the 3% annual rate “targeted” by the administration. The consumer will likely shoulder the burden again, as was the case in Q2. “We expect the BEA’s advance estimate of Q3 GDP to post growth of 1.5% q/q saar, compared to 2.0% in Q2”, Barclays said late last week. “This is expected to be driven by personal consumption spending (2.5% q/q saar)”.
Read more: A ‘Hawkish Cut’ From A ‘Derelict’ Fed? What To Expect From The October FOMC
“The advance 3Q GDP report is likely to show moderation in real growth to a below-trend pace of 1.5% qoq saar from 2.0% in 2Q”, BofA projects, noting that while consumption “was solid last quarter [and] government spending and residential investment were also [strong] we expect muted equipment investment and a sharp plunge in structures”.
As for payrolls, the labor market is clearly cooling, as September’s report made clear. The 136k print from last month was decent, and revisions added 45k to the headlines for July and August, but October is expected to show one of the worst prints of the Trump presidency at 88k.
“We expect nonfarm payrolls to rise by 90k with private sector employment in the establishment report rising by only 75k on the month”, Barclays said Sunday, adding that “the GM auto worker strike spanned the survey period and we expect the roughly 46k striking workers to fall off manufacturing payrolls temporarily”.
BofA is looking for just 25k on the headline. “We expect the pace of job gains to slow materially because we think that the fallout from the General Motors-United Auto Workers strike could be a drag of as much as 150k on payrolls in October as the strike ran through the BLS survey period”, the bank warns. “Indeed, our private payrolls tracker based on internal BAC data is looking for a decline of 41k in October, which we suspect is being weighed down by the strike”.
As far as ISM manufacturing goes, the bottom line is that any rebound would be welcome after two consecutive months in contraction (see the bottom pane in the visual). The global factory slump has shown few signs of abating amid the protracted trade war between the world’s two largest economies and markets are on tenterhooks to see if we get a bounce that indicates the US isn’t headed for a deeper manufacturing downturn.
All of this could reinforce the Fed’s message (on Wednesday) or undermine it altogether, depending on how it pans out. “I almost think we’re one bad employment figure away from them saying, these weren’t insurance cuts, these were real cuts, and we haven’t done enough”, Bloomberg quotes Potomac River Capital CEO Mark Spindel as saying.
If things fall apart on the data front, any pretensions to a “hawkish” cut will be immediately seen as untenable.
Full calendar via BofA
Keep money market funds in mind when pondering the Fed lowering rates; here’s a FRED chart showing changes in flow. This is fairly interesting,as it looks like people are getting spooked and moving cash away from treasuries, and of course, that’s what happened back around 2009. If the Fed is bullied into lowering rates it really does seem like it’s a Catch-22, where their damned by trump’s MAGA miracle stupidity, i.e., they can’t cut, stay put or do anything useful — and any message they send will be useless, which more than likely will result in people feeling more and more cautious as they ponder risk and recession and impeachment impacts. Maybe Powell can offer a hint as o how the Fed will deal with the deficit and impeachment?
Money market funds; total financial assets, Flow, Millions of Dollars, Seasonally Adjusted Annual Rate (MMMFTAQ027S)
Money market funds; Treasury securities; asset, Flow, Millions of Dollars, Not Seasonally Adjusted (BOGZ1FA633061105Q)
https://fred.stlouisfed.org/graph/?g=plTm
A few exchanges below on Fed reserves from an old Fed transcript, which offers a few hints about flow (Conference Call of the Federal Open Market Committee on August 1, 2011). There are obviously more recent chats about this topic, but this one is of interest with FDIC, Treasury and tons of agencies in panic mode)!
MR. FISHER. Mr. Chairman, I presume that the effect of the money market funds’ activities that Brian mentioned is reflected in an increase in excess balances held by us. Is that correct, Brian?
MR. SACK. The aggregate amount of reserves in the system isn’t going to change, but this is a change in the flow of those investments. So essentially, the money funds are taking money out of repo, and actually out of some bank liabilities, and increasing their holdings of deposits at other financial institutions
MR. ENGLISH. One thing that could happen if policy were being implemented in more or less the usual way is if people wanted reserves, they’d push up the federal funds rate, and the Desk, in responding to the higher federal funds rate, would be adding reserves, and so potentially the supply of reserves would be elastic. Now, how elastic it would be in that situation I’m not sure, but the Desk would be aiming to keep the fed funds rate at the target level, and a high demand for reserves would lead them to add reserves
MS. DUKE. (Wells Fargo current chairman and former Board of Governors of the Federal Reserve System) I guess my question, though, is if deposits are flowing in everywhere, I can see who would want to lend reserves. I just can’t see who would want to borrow those reserves.
MR. ENGLISH. That’s exactly the point. People would want to accumulate the
reserves, so the demand for reserves would be higher
MS. DUKE. Thank you, Mr. Chairman. I’m fully in support of items 1 through 5. With respect to 6 and 7, I’ve said before and I’ll say again here, I think we should consider expanding
the short-term money markets, including the repo markets, that are subject to our rate targets. With the size of our balance sheet and the fact that we’re paying interest on reserves, we’ve actually taken over the traditional fed funds market. Both of these scenarios contemplate rates in
other short-term funding markets moving outside of the fed funds target, so I think that actions that are necessary to move those rates back inside the target would be appropriate and could include the purchases of Treasury bills.
MR. SACK. The aggregate amount of reserves in the system isn’t going to change, but this is a change in the flow of those investments. So essentially, the money funds are taking money out of repo, and actually out of some bank liabilities, and increasing their holdings of
deposits at other financial institutions.
MS. DUKE. Just one hypothetical question. If they were investing all of this run-up in deposits in reserves at the Fed, if our balance sheet wasn’t so large, if those reserves weren’t available, where might they have invested them? It seems to me that the reserves are an attractive investment because they can be redeemed at par. So would that be something that we might look at as a tool in the toolkit if this were to happen in a future situation where there weren’t so many reserves in the system?