- Markets are fully committed to a Fed rate cut this month, with CME data showing investors have priced in a 0% chance of a hold as weak labor figures and softer inflation drive dovish bets. Economists like Deutsche Bank’s Jim Reid and UBS’s Paul Donovan cautioned that while headline data supports easing, the details reveal more mixed pressures that Powell will need to weigh.
There are few “sure things” when it comes to economics. And yet interest rate traders are 100% convinced a cut is coming at the Fed’s next meeting.
Of course, this does mean markets may be setting themselves up for a world of pain if Jerome Powell and the Federal Open Market Committee (FOMC) are not as convinced by the data they’re seeing.
A few factors have prompted market confidence in a cut. The first is the labor market, which is looking considerably weaker than previously thought. A gamut of figures has painted this picture, from slowing hiring (payrolls added just 22,000 jobs last month) to a significant downward revision in roles last year (911,000 less than previously stated).
This means the FOMC’s attention may be forced back to the maximum employment side of its mandate, forcing it to relinquish some of its grip over stable pricing and inflation at 2%.
Indeed, the price stability side of the mandate may be faring a little better than previously expected. Yesterday, the Bureau of Labor Statistics shared the latest update to the producer price index (PPI), which often acts as a precursor to wider inflation trends. And unexpectedly demand edged down 0.1% in August, though prices excluding food, energy, and trade services rose 0.3%, the fourth consecutive increase.
That being said, the marginal increase hasn’t been enough to deter investors from their dovish hopes. According to CME Group’s FedWatch, there is a 0% likelihood of the Fed holding at its meeting later this month.
This morning 92% of analysts were banking on a cut of 25 basis points, while 8% were banking on 50 basis points; a hold is priced at 0.0%.
Breezing past the details
This sentiment, coupled with the S&P 500 rising higher thanks in part to gains from Oracle, has led to “a perfect alignment of macro and micro,” wrote Deutsche Bank’s Jim Reid to clients this morning.
He added: “Taking the PPI categories that feed into core PCE [personal consumption expenditures]—airfares, portfolio investment, and medical care services—our U.S. economists see August core PCE inflation tracking at +0.32%, in line with their pre-PPI expectations. But the market focus was very much on the downside surprise in the headline number, as that was seen as giving the Fed more space to cut rates in the months ahead.”
At UBS, chief economist Paul Donovan remarked similarly that while the devil is in the details, markets (and indeed politicians) will use the data to hammer home their opinion that the base rate is too restrictive.
“There were extremely high increases in the price of U.S.-assembled computers, electronic components, vehicle parts, tires, household textiles, and so on,” Donovan remarked. “Profit margins, which are loosely hinted at in the data, seem to be increasing in areas like furniture and clothing wholesalers, and clothing retail.
“The pattern in the detail is not, perhaps, entirely unexpected: Higher prices where costs are rising and higher margins where retailers can create a story that blames a cause which is not ‘more profit for us.’
“With today’s official U.S. consumer price inflation data released for August, the same problems arise. It’s the details more than the headline that is going to matter, although politicians will rely on point-scoring from the main number.”
Whether Jay Powell is aiming to cut or not in September, he’ll likely have to endure some further “Too Late” gibes before then.
Here’s a snapshot of the markets globally this morning:
- S&P 500 futures were up 0.13% this morning.
- STOXX Europe 600 was up 0.35% in early trading.
- The U.K.’s FTSE 100 was up 0.46% in early trading.
- Japan’s Nikkei 225 was up 1.22%.
- China’s CSI 300 was up 2.31%.
- The South Korea KOSPI was up 0.9%.
- India’s Nifty 50 was up 0.15%.
- Bitcoin rose to $114,156.
