Fed Minutes, Fed Speakers and CPI
After the disappointing ISM numbers last week, and the middling jobs report, odds of an October rate cut rose to 75%, so the eight Fed speakers this week have the opportunity to adjust investor thinking if they’re not equally on board with the rate cut. To date, Fed comments have been measured and varied as to another rate cut, but with the economic numbers last week that pushed odds into virtual “done-deal” territory Fed officials will have a chance to agree or disagree with that assessment. Meanwhile, another week of trade and impeachment developments will be in store, with one driving the other. With the impeachment inquiry hanging over the presidency, the administration would love to score a trade win of some sort to offset the impeachment news flow. Expect pieces of “good news” to dribble out on the trade front to offset impeachment headlines. Finally, September CPI on Thursday is expected show slowing in monthly gains with YoY numbers near unchanged.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||2.03%|
|6 Mo LIBOR||1.95%|
|12 Mo LIBOR||1.85%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Oct 8||NFIB Small Business Optimism||Sep||102.5||102.0||103.1|
|Oct 8||PPI (YoY)||Sep||1.8%||1.8%||1.8%|
|Oct 8||PPI Ex-Food & Energy (YoY)||Sep||2.3%||2.3%||2.3%|
|Oct 9||FOMC Meeting Minutes||Sep 18||NA||NA||NA|
|Oct 10||CPI (YoY)||Sep||1.8%||1.8%||1.8%|
|Oct 10||CPI Ex-Food & Energy (YoY)||Sep||2.4%||2.4%||2.4%|
|Oct 11||U. of Mich. Consumer Sentiment||Oct P||92.0||92.0||93.2|
|Oct 11||U. of Mich. Expectations||Oct P||83.4||83.4||83.4|
|Oct 11||U. of Mich. 5-10yr Inflation||Oct P||2.4%||2.4%||2.4%|
Top 5 Events for the Week
Oct. 7 - 11, 2019
1. Fed Minutes & Speakers – Wednesday
2. Trade and Impeachment Developments – All Week
3. September Inflation Reports – Tues./Thurs
4. NFIB Small Business Optimism – Tuesday
5. October U. of Mich. Sentiment – Friday
1. Fed Minutes & Speakers — All Week
The September FOMC meeting delivered a rate cut but it didn’t project another rate cut by year-end, at least as measured by the median of the infamous dot plot. Those dots revealed a split of the committee into three groups: one wanting no cut, a second approving the September rate cut, and a third group that was expecting another cut before year-end. Further clues indicate the group looking for another rate cut this year are likely those with votes versus members with no voting privileges this year. The minutes will be viewed for clues as to possible balance sheet growth and other repo-related conversations. Of course, with the weak ISM numbers last week, and the middling jobs report, odds of an October rate cut rose to 75%, so the minutes may lose some of their luster. That’s where the Fed speakers this week come into play. Eight Fed speakers, including Chair Powell on Tuesday and Wednesday, will have ample opportunity to push back against the markets’ rate-cut projections. To date, comments have been measured and varied as to another rate cut, but with the economic numbers last week pushing odds into virtual done-deal territory, Fed officials will have a chance to agree or disagree with that assessment.
2. Trade & Impeachment Developments – All Week
Another week of trade and impeachment developments will be in store, with one perhaps driving the other. With the shadow of an impeachment inquiry hanging over the presidency, the administration no doubt would love to score a trade win of some sort to offset the impeachment news flow. That’s why we expect bits and pieces of “good news” to dribble out on the trade front but it’s unlikely we’ll get a major announcement this week. With the Chinese understanding the political turmoil they may relent on small measures but a major breakthrough deal is unlikely. Meanwhile, the impeachment inquiry is moving along but investors are still giving it little odds of eventually succeeding so while it creates some uncertainty, the trade headlines will likely be a bigger market mover.
3. September Inflation Reports — Tuesday/Thursday
Away from the Fed and political headlines, the CPI report is the leading economic release this week. While odds of a 25bps rate cut are leaning heavily towards a cut, a stronger-than-expected report will prompt a rethink. Expectations are for overall CPI to be up 0.1% matching the 0.1% increase in August. The core rate (ex-food and energy) is expected to increase 0.2% after three straight month’s of 0.3% increases. On a year-over-year basis, CPI is expected to be 1.8% versus 1.7% in August while core CPI YoY is expected to remain unchanged at 2.4%. As for the Fed’s reaction function, we think a stronger-than-expected inflation read could very well halt a rate cut in October while an as-expected or weaker report will green light a 25bps cut.
4. September NFIB Small Business Optimism — Tuesday
While the consumer has proven resilient to negative headlines and continues to spend and carry the economic load, the business community has been a little more reluctant with trade uncertainties and tariffs. Large businesses have pulled back on investments for the better part of a year while small businesses have continued to express confidence but that has been trending a bit lower lately. The NFIB Small Business Optimism Index peaked at 108.8 in August 2018 and the twelve-month low was 101.2 back in January. Expectations for September are for the index to print a 103.1 which is the same as the August reading. The average for the past year has been 104.1 so a slightly below average reading is expected but not a material decline in confidence is expected.
With consumer consumption two-thirds of the economy, readings on consumer confidence are an early tell on future spending. If confidence readings start to trend lower it’s definitely a warning sign that the consumer may be close to pulling back. The preliminary October read from the University of Michigan on sentiment is expected to be 92.0 versus 93.2 in August. The high print was a 101.4 in March of 2018 when tax cut euphoria was running high. The October print, if it comes as expected, would mostly mirror the September result and after a steep drop in August would add some stability to the reading. The average over the past year has been 96.2 so a slightly below average print is expected but nothing to denote a material drop in confidence. Inflation estimates are expected at 2.8% for the 1yr period and 2.4% for the 5-10yr horizon.
Thomas R. Fitzgerald
Director, Strategy & Research