Evercore’s Ed Hyman gets it. “If they don’t do 50 tomorrow I’ll be shocked,” Hyman, a perennial Institutional Investor poll winner, told Bloomberg TV on Tuesday.
I’d be shocked too. I’m going to be completely honest with you: As of noon on September 17, the odds of a half-point first rate cut from the Fed at the September meeting were basically 100%.
Anything can happen, of course. And I’ve been wrong before. But the writing on the wall was billboard-tall by Tuesday afternoon in the US, as Robert Kaplan piled on and Nick Timiraos offered a belabored explain-a-thon on social media: It’s going to be 50, which means betting odds still showing a coin toss were tantamount to free money.
That’s not investment (or gambling) advice and I’ll be gung-ho and gleeful when it comes to deriding my own failed Fed tasseography if the Committee “shocks” Hyman on Wednesday. I’m a lot of things, but shy about admitting mistakes and embarrassed about being wrong aren’t among them.
With that caveat, let me reiterate: The 25 versus 50 debate wasn’t even odds when the Committee convened on Tuesday morning. Nowhere close to even odds. It was probably more like 80% in favor of 50. If you don’t understand why that’s the case, you don’t know how to read the proverbial tea leaves.
“The 50bps easing kick-off is now obviously socialized,” Nomura’s Charlie McElligott remarked. He hedged a little bit, employing the word “seemingly” and flagged some monetization in STIR upside, but in my view that’s just profit-taking, not evidence that anyone doubts 50.
Jerome Powell, McElligott correctly assessed, probably “wanted [50bps] all along” given his unequivocal remarks about preempting additional labor market softening in Jackson Hole.
It goes without saying that the 25 versus 50 debate is irrelevant for Main Street in any sort of “real-time” context. As I put it a few days ago in response to a commenter, “Joe Average” isn’t going to go hire 10 people he wasn’t planning to hire “because 50.” But in the market’s eyes, 50 does more to cut left-tail hard landing risks than 25, and that matters.
As noted here earlier Tuesday, a US recession was viewed as the biggest tail risk by fund managers in this month’s BofA poll.
Remember the early-August and early-September vol-of-vol spasms? Well, as McElligott wrote Tuesday, the higher vol-of-vol environment reflected “the fear that the Fed is behind the curve, especially as it relate[s] to the labor softening witnessed in recent months.” A 50bps move out of the gate will mitigate that. Again, in the market’s eyes.
Assuming 50, the left-tail will be “perceived as a smaller risk moving forward, because by leading with a 50bps cut,” the Fed will be viewed by markets as “playing offense and getting ahead of any developing issues within the jobs market.”
If stocks can make it through what could be a challenging seasonal for liquidity, there’s daylight into year-end. “It’s my belief that with this repricing of tails thanks to a seemingly deeper initial cutting path, the energy within the market to continue rallying into the year-end” increases, “with ‘big numbers’ in play for SPX,” McElligott added.
