The Market Today

Fed Officials Not Committed to Drastic Cut; Trade Meeting Set for October

by Craig Dismuke, Dudley Carter


Important Few Days Ahead for Economic Data: The economic calendar becomes very busy over the next two days with a flurry of important reports which, along with next week’s CPI and retail sales data, will be the last look at some key economic information heading into the Fed’s September 18 policy decision.

ADP Projects Strong Private Sector Job Growth for August: The ADP Employment report projected 195k private payrolls added to the workforce in August, significantly stronger than the expected 148k.  Particularly strong in August were 66k new job gains at smaller businesses (0-49 employees) which had seen three consecutive weak months. Job gains in the goods-producing sector remained soft, adding just 11k total versus a 12-month average of 25k per month.  The ADP report has historically been a moderate indicator for the more market-moving BLS report (released tomorrow), missing by an average of 66k per month over the past 12 months and 61k per month over the past 36 months.  As such, a weak BLS report is still in the realm of possibility.  Regardless, the stronger-than-expected ADP report will boost optimism, for the next 24 hours at least, that perhaps the labor market is not slowing as much as it has recently appeared.

Jobless Claims Repeat Theme of Stable Labor Market: Initial jobless claims for the week ending August 31 ticked up from 216k to 217k, remaining on the low side of the 2019 range.  This is yet another sign of a still-solid labor market.

ISM Non-Manufacturing Index and Final Capital Goods Revisions: At 9:00 a.m. CT, the ISM Non-Manufacturing index is expected to inch higher (from 53.7 to 54.0) from July’s disappointing report, which was the weakest reading in three years.  This is a key metric right now given the concerns that weakness in manufacturing could begin to spread to the broader economy.  Also at 9:00 a.m., the July Factory Orders report will provide a final revision to the capital goods orders and shipments data.  This data is an important indicator of business investment in equipment, which showed an expectedly strong read on new activity in the data’s initial release.


Global Developments Fostered Bid For Risk Assets: U.S. stocks rose Wednesday after global stocks rallied overnight on a better-than-expected services PMI from China and positive political developments in Asia and Europe. Hong Kong’s Chief Executive pulled the extradition bill that was the original spark behind recent fiery protests, and the U.K. parliament voted to take control of the legislative agenda. Hong Kong’s Hang Seng led the global equity rally and U.K. yields had dragged sovereign yields higher overnight. The pound continued to push higher during U.S. trading after parliament voted in favor of blocking a no-deal Brexit and against PM Johnson’s call for general elections.

Fed Won’t Pre-Judge September, But Hints At Cut Amid Gloomy Outlook: U.S. equities remained strong throughout afternoon, pushing the S&P 500 up 1.1%, but Treasury yields pulled back from their overnight highs. While the Fed’s Beige Book showed activity and the outlook remained stable in the face of the recent trade escalation (more below), a busy day of Fedspeak didn’t push back on market expectations for a rate cut in September (more below). The Fed Funds futures’ implied rate path moved modestly lower, helping nudge the 2-year yield down 2.2 bps to 1.43%, a new two-year low. The 5-year yield fell 1.1 bps to 1.32%, a new low back to November 2016, while the 10-year yield actually rose 0.8 bps to 1.47%.


Sentiment Gets A Boost After Trade Talks Get Scheduled: Global investors cheered news that the U.S. and China had agreed to another round of trade talks early next month. China’s commerce ministry issued a statement Thursday that said the two sides had spoken and agreed to a meeting of top trade officials in Washington in “early October.” The statement also indicated preparatory meetings by mid-level officials will occur in the coming weeks. The U.S. Trade Representative’s office confirmed the meetings had been agreed to, and that the mid-level meetings would hopefully “lay the groundwork for meaningful progress.”

Equities Rose On Trade News: China’s CSI 300 jumped 1.0% Thursday on hopes the talks could avoid further escalation, while Europe’s Stoxx 600 was 0.6% higher on widespread gains across the continent. Hong Kong’s Hang Seng was mostly flat after yesterday’s political-relief rally and the U.K.’s FTSE 100 stood out as a downside outlier, dropping 0.7% midway through the session as the pound continued to strengthen. The currency touched a six-week high after parliament made it tougher Wednesday for PM Johnson to pull the country out of the EU without a deal.

Sovereign Yields Got A Boost: The improved sentiment that pushed up equities around the globe has also given a boost to sovereign yields. Ten-year yields in the U.K. and Italy were both up more than 8 bps around 7 a.m. CT while those in Germany and France had risen more than 6 bps. Treasury yields also pushed higher ahead of this morning’s packed U.S. economic calendar, but lagged the moves across Europe. The 2-year yield had risen 3.0 bps while the 10-year yield had risen 4.0 bps. After the stronger-than-expected ADP report, the 2-year yield rose to up 6.2 bps on the day, and the 10-year yield increased its overnight jump to 6.4 bps.


Williams Won’t Pre-Judge September, But Signaled He’s Open To More Accommodation: New York Fed President Williams said “a less rosy outlook” was behind the Fed’s July decision to cut rates and end the balance sheet run-off early, and that he remains “vigilant to act as appropriate” to sustain the expansion. He noted “the economy is in a good place,” but “beyond the headline GDP figure…there are more mixed signals coming from different sectors.” “Persistently low inflation is a key area of my attention,” Williams said, and “at present, slowing global growth and geopolitical uncertainty pose particular challenges.” Adding in trade uncertainty, Williams highlighted that “the effects of this angst are already showing up in the investment numbers.” Looking ahead, he said the Fed’s “role is to navigate a complex and at times ambiguous outlook,” discerning between developments which “are mere bumps in the road” and others that could pose a more persistent drag. “We need to consider all of the information available and be flexible in response,” Williams concluded.

Kaplan Said Risks Are To The Downside: Dallas Fed President Kaplan isn’t surprised that manufacturing has been beleaguered by the trade war, but said the consumer has remained strong and the overall picture has been mixed. However, he’s watching for psychological effects of the uncertainty to show an impact on consumer morale, because waiting for visible weakness in the actual spending data could mean any Fed response would be too late. With regards to the broader outlook, Kaplan believes the risks are to the downside and highlighted that it’s noteworthy the Fed Funds rate is higher than the entire yield curve.

Kashkari Supports Rate Cutting, But Said It Could Ultimately Be Ineffective Against A Trade War: Minneapolis Fed President Kashkari again signaled he would support another rate cut in September. He believes that, “If the rest of the global economy slows down, that will end up slowing down the U.S. economy too.” He added that “tariffs and the trade war are really concerning businesses,” but the curve inversion “is probably the most concerning signal that we’re seeing right now.” Hinting at his lean toward another rate cut, “I think monetary policy…is moderately contractionary” and “until we see inflation, I don’t actually think we should tap the brakes.” However, he said rate cuts could prove to be a “poor tool” to address trade uncertainty. “If the trade war really gets a lot worse, monetary policy Is going to be very limited in its ability to respond to that,” Kashkari noted.

Sanguine Beige Book Sounds Optimistic In The Face Of Trade Tensions: While the day’s Fedspeak sounded consistent with market expectations for a September rate cut, the August Beige Book didn’t describe an economic story that, by itself, would seem to support speculation that cut could be a 50-bp adjustment. Overall activity and employment continued to expand at a “modest” pace through August, despite the escalation of trade tariffs. Consumer spending was described as “mixed” while manufacturing was down only “slightly from the previous report.” Concerns about the services sector, created by weakness in recent PMI surveys, were absent from the National Summary. “Reports on activity in the nonfinancial service sector were positive” and noted “similar or improved activity.” Looking ahead, “Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook.” Still, the Fed appears to have latitude to respond to uncertainty considering wage growth remained “modest to moderate” and broader inflation pressures remained “modest.”

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