Fed Rate Cut Expected on Wednesday

Oct 28, 2019
Federal Reserve Building

Fed Rate Decision & Jobs Numbers

The FOMC rate decision on Wednesday will be the highlight of the week but the Friday jobs report will be a close runner-up. Expectations are for the Fed to deliver a “hawkish cut”.  They will cut the funds rate 25bps (1.50%-1.75%) but also stress either in the statement and/or press conference that the fed will enter another period of pause to assess the impact of the cumulative 75bps of cuts done year-to-date. The market is already just about there as the December Fed Funds Futures have the year-end rate at 1.53%, just below the 1.62% level that the effective rate will likely be after the expected Wednesday rate cut. The December 2020 futures rate is 1.30%, so the market is pricing in just one additional cut in 2020; thus, a hawkish cut is not likely to upset Treasury prices as the market outlook seems to be aligning with the Fed. The October Friday jobs report is expected to print a somewhat disappointing  85k in job gains—the lowest since May’s 62k—as 55k manufacturing jobs are expected to be shed (including GM strikers so some of the sting will be reversed next month). In any event, as jobs are a lagging indicator it’s not surprising that soft survey reports like ISM Manufacturing have taken awhile to show in real numbers and if that continues the Fed will be back in easing mode. 


Treasuries
Treasury Curve Today Week Change
3 Month 1.66% -0.01%
6 Month 1.66% -0.03%
1 Year 1.60% -0.03%
2 Year 1.64% +0.05%
3 Year 1.64% +0.06%
5 Year 1.66% +0.07%
10 Year 1.84% +0.06%
30 Year 2.33% +0.05%
Short-Term Rates
Fed Funds 2.00%
Prime Rate 5.00%
3 Mo LIBOR 1.93%
6 Mo LIBOR 1.94%
12 Mo LIBOR 1.96%
Swap Rates
3 Year 1.638%
5 Year 1.629%
10 Year 1.755%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Oct 28 Advance Goods Trade Balance Sep -$73.5b -$70.4b actual -$72.8b
Oct 29 S&P CoreLogic CS 20-City HPA Aug 2.04% 2.10% 2.00%
Oct 29 Conf. Board Consumer Confidence Oct 128.0 128.0 125.1
Oct 30 GDP Annualized (QoQ) 3Q A 1.6% 1.6% 2.0%
Oct 30 FOMC Rate Decision Oct 30 1.50%-1.75% 1.50%-1.75% 1.75%-2.00%
Oct 31 Personal Spending Sep 0.3% 0.3% 0.1%
Nov 1 Change in Nonfarm Payrolls Oct 90k 85k 136k
Nov 1 Unemployment Rate Oct 3.6% 3.6% 3.5%
Nov 1 Avg. Hourly Earnings (YoY) Oct 3.0% 3.0% 2.9%

calendar icon Top 5 Events for the Week

Oct. 28 - Nov 1, 2019

1. FOMC Rate Decision –Wednesday
2. October Employment Report –Friday   
3. 3rd Quarter GDP –Wednesday
4. October Consumer Confidence–Tuesday 
5. September Advance Goods Trade Balance–Monday

 

1.  FOMC Rate Decision—Wednesday

The FOMC rate decision on Wednesday will be the highlight of the week and expectations are for the Fed to deliver a “hawkish cut”. That is, they will cut the funds rate 25bps (1.50%-1.75%) but also stress either in the statement and/or press conference that they’ll be entering another period of pause to assess the impact of the cumulative 75bps of cuts done year-to-date. The market is already just about there as the December Fed Funds Futures have the year-end rate at 1.56%, just below the 1.625% level that the effective rate will likely be after the expected Wednesday rate cut. The December 2020 futures rate is 1.25%, so the market is pricing in just one additional cut in 2020; thus, a hawkish cut is not likely to upset Treasury prices as the market outlook seems to be aligning with Fed expectations. 

 

2.  October Jobs Report –Friday

The October jobs report on Friday is expected to print a somewhat disappointing  85k in job gains—the lowest since May’s 62k—as 55k manufacturing jobs are expected to be shed (although GM strikers skew that number). It seems the months of disappointing ISM Manufacturing prints will finally be reflected in actual hiring numbers. As jobs are a lagging indicator it’s not surprising that it’s taken awhile to show in real numbers and if that continues the Fed will be back in easing mode. The days of 200k gains are behind us and it looks like gains even in the low-to-mid 100’s will be a stretch. The unemployment rate is expected to tick up from the cycle low of 3.5% to 3.6%. Meanwhile, wage gains are expected to improve to 0.3% from September’s disappointing 0.0%. YoY wage gains are expected at 3.0% from 2.9% the prior month. In summary, if the report comes as expected it will show reflect a labor market that is finally showing the impact of the trade war on the slowing manufacturing sector. 

 

3.  First Estimate of Third Quarter GDP—Wednesday

The First estimate of Third Quarter GDP is expected to print at 1.6% which is off the 2.0% for the second quarter. The projected slowdown is due to an expected slowing in consumer consumption from a rate of 4.6% in the second quarter to 2.6% in the third.  That slowing is part of the reason for the Fed’s switch to an easing policy during the quarter. The Atlanta Fed’s GDPNow model is a little more optimistic with a 1.76% GDP forecast.

 

4.  October Consumer Confidence—Tuesday

As mentioned above, the outsized increase in consumer consumption during the second quarter is expected to have moderated in the third quarter slowing GDP to under 2%. Thus, measuring consumer confidence is critical to gauging their predilection to continue spending into the fourth quarter.  In that regard, the Consumer Board’s Consumer Confidence report tomorrow is expected to post a modest sequential increase to 128.0 versus 125.1 in September. The high was 137.9 a year ago, just as fourth quarter volatility was beginning. 

 

existing home sales annualized

 

5.  September Advance Goods Trade Balance –Monday

The monthly trade balance reports carry more weight now that trade war negotiations are hot and heavy and subject to presidential tweet. For September, the goods trade balance is expected to widen slightly to -$73.5 billion versus -$72.8 billion in August. The trade deficit has ranged from a  twelve-month wide of -$79.9 billion in February to a narrow -$69.9 billion in December. The deficit was -$75.3 billion a year ago.

 


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CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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