Market Pricing for December Takes Some Pressure Off Powell

We expect the FOMC to cut the fund’s rate target by 25 basis points at this week’s meeting. As we wrote in our FOMC Briefing, the focus for this meeting will be on communication, both in the statement and press conference. We think the narrative will be that—notwithstanding some softer incoming data—the outlook remains favorable and the Committee believes that they have taken the appropriate insurance with their actions through October, the effects of which are yet to be fully felt. The market-implied probability of a  fourth cut this year is currently about 30%, which we believe participants will see as suggesting that market expectations are not unreasonably out of line with their own inclinations. 

Nowcasts (2019:Q3) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.7% 1.8% 1.7%
New York Fed Staff Nowcast 1.9% 1.9% 2.0%
CNBC/Moody’s Survey 1.6% 1.5% 1.7%

Recent Data 

The incoming data over the last week continued to bode poorly for business fixed investment. Core orders and shipments both declined more than anticipated in September. The shipments data point to a contraction in equipment investment in Q3, and the recent softness in orders suggests continued weakness at least in the near term. In the final results of the Michigan survey for October, the measure of longer-term expected inflation was revised up to 2.3% from 2.2%, it’s an all-time low. While that’s still an uncomfortably low level,  it’s where it was leading up to the last FOMC meeting, which takes some pressure off the Committee to  change the language that “survey-based measures of longer-term inflation expectations are little changed.”  Changing that language would be a very dovish signal and difficult to reconcile with the narrative that we believe the FOMC wants to establish at this week’s meeting. 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Existing Home Sales MoM Sep -2.2% -0.7% 1.5% 1.3%
Core Capital Goods Orders MoM Sep P -0.5% -0.1% -0.6% -0.4%
Core Capital Goods Shipments MoM Sep P -0.7% -0.2% 0.0% 0.3%
Markit US Manufacturing PMI Oct P 51.5 50.9 — 51.1
Markit US Services PMI Oct P 51.0 51.0 — 50.9
Markit US Composite PMI Oct P 51.2 — — 51.0
New Home Sales MoM Sep -0.7% -1.6% — 7.1%
U. of Mich. Sentiment Oct F 95.5 96.0 — 96.0
U. of Mich. 5-10 Yr Inflation Oct F 2.3% — — 2.2%
Advance Goods Trade Balance Sep -$70.4b -$73.5b -$73.1b -$72.8b
Wholesale Inventories MoM Sep P -0.3% 0.2% — 0.2%

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