Market Awaits Wednesday FOMC Rate Decision

Sep 16, 2019
Federal Reserve Building

Market Awaits Wednesday FOMC Rate Decision

Some weeks are harder than others in pinpointing the market moving  event beforehand. This is not one of those weeks. The FOMC rate decision on Wednesday will be THE key event, and while a 25bps rate cut is a fait accompli so much more will hinge on the forecasts and messaging emanating from the meeting.  Given the core CPI beat and solid August retail sales numbers Powell and company are not likely to strike overly dovish tones either in the statement or in the press conference.  A new dot plot will be forthcoming  and that will be scoured for indications of a third rate cut by year-end and the outlook for next year. Fed funds futures now see a year-end rate of 1.71% or 70% chance of a third rate cut while year-end 2020 futures are at 1.31%, reflecting just under two cuts next year. While Powell has tended to out-dove the doves this year, it’s difficult to see the Fed matching the level of accommodation expected by the market, especially with inflation ticking higher and the consumer still looking solid, and that could lead to additional pressure on Treasuries.


Treasuries
Treasury Curve Today Week Change
3 Month 1.96% UNCH
6 Month 1.91% +0.04%
1 Year 1.84% +0.09%
2 Year 1.76% +0.20%
3 Year 1.72% +0.23%
5 Year 1.71% +0.26%
10 Year 1.85% +0.26%
30 Year 2.32% +0.25%
Short-Term Rates
Fed Funds 2.25%
Prime Rate 5.25%
3 Mo LIBOR 2.12%
6 Mo LIBOR 2.07%
12 Mo LIBOR 2.05%
Swap Rates
3 Year 1.682%
5 Year 1.646%
10 Year 1.737%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Sep 16 Empire Manufacturing Sep 4.0 2.0 (actual) 4.8
Sep 17 Industrial Production (MoM) Aug 0.2% 0.2% -0.2%
Sep 18 Housing Starts (MoM) Aug 5.0% 5.0% -4.0%
Sep 18 Building Permits (MoM) Aug -0.8% -1.3% 6.9%
Sep 18 FOMC Rate Decision Sep 18 1.75%-2.00% 1.75%-2.00% 2.00%-2.25%
Sep 18 Interest on Excess Reserves Sep 18 1.85% 1.85% 2.10%
Sep 19 Philly Fed Biz Outlook Sep 11.0 10.0 16.8
Sep 19 Leading Index Aug 0.1% 0.0% 0.5%
Sep 19 Existing Home Sales (MoM) Aug -0.9% -0.9% 2.5%

calendar icon Top 5 Events for the Week

Sep. 16 -20, 2019

1. FOMC Rate Decision – Wednesday
2. August Leading Index – Friday        
3. August Existing Home Sales – Friday    
4. August Housing Starts & Permits – Wednesday
5. Empire Manuf. & Philly Fed Surveys – Mon/Fri.

 

1.  FOMC Rate Decision – Wednesday

The FOMC rate decision on Wednesday will be THE key event this week and while a 25bps rate cut is a fait accompli, so much more will hinge on the forecasts and messaging emanating from the meeting.  Given the core CPI beat and solid retail sales numbers from last week, Powell and company are not likely to be in a overly dovish mood, either in the statement or in the press conference.  One can foresee references to “data dependence” being uttered as guidance for future rate moves as the recent economic and inflation readings give them some justification for a pause.  New economic forecasts aren’t likely to stray too far from the 2.1% GDP expected for 2019 in the June forecast. A new dot plot of fed funds rates will be forthcoming  and that will be scoured for indications of a third rate cut by year-end and the outlook for next year. Fed funds futures now see a year-end rate of 1.71%, or 70% chance of a third rate cut, while year-end 2020 futures are at 1.31%, reflecting a little less than two additional cuts next year. Given the aforementioned strength in in retail sales and core CPI, the Fed is not likely to be so accommodative in their forecasts and that could lead to additional pressure on Treasuries.

 

2.  August Leading Index – Friday

The Conference Board’s Leading Index is a compilation of metrics that tend to foretell economic direction, and it is particularly useful as a predictor of recessions. The index always falls well below zero prior to a recession and earlier in the year the index was flirting with the zero-level and printed a –0.3 in June. The index, however, rebounded some in the summer and would need to move below -1.0 to provide a reliable recession signal. That being said, the August number is expected to dip from July’s 0.5 to 0.0. If the index matches expectations it will be a signal that the economy is slowing and flirting with an early-stage recession signal.

LEI YoY and Recessions

 

3.  August Existing Home Sales – Friday

The rally in mortgage rates in August probably won’t be reflected in increased housing activity until September, at the earliest, and as such the pick-up in July activity is not likely to be repeated in August. Existing home sales account for about 90% of housing activity and Friday’s existing sales number is expected to decrease –0.9% to 5.37 million units annualized. The average over the past year has been 5.24 million so a modest gain  over the yearly average but some plateauing in activity versus July.

 

4.  August Housing Starts & Permits – Wednesday

Before we get the existing home sales numbers on Friday we’ll get housing starts and permits on Wednesday. The series gives us a look at future sales as permit activity moves to starts and starts hopefully to sales. Housing starts for August are expected to increase a healthy 5.0% to 1.25 million annualized while permits are expected to decrease –1.3% to 1.30 million annualized. So, something of a mixed read with starts gaining and permits slipping and such is the nature of housing in the last year or so: treading water with neither a ramp higher in activity nor a fall-off either.

 

5.  Empire Manufacturing & Philly Fed Surveys – Monday/Friday

The manufacturing sector has borne the brunt of the domestic slowdown and that has been reflected in survey measures as well as real output. Global slowing, dollar strength, and trade war uncertainties have all weighed on both sentiment in the sector and in real activity.  The Empire Manufacturing survey, which measures activity in the New York Fed district, is out this morning with a 2.0 print versus an expected 4.0 and this is off the August read of 4.8 and well off the annual average of 9.7. This is another indication of the developing slump in the manufacturing side of the economy. The Philly Fed Business Survey is due on Friday and it’s expected to be 10.0 versus 16.8 in August. The annual average for that survey is 12.73.

 


bar graph icon  Investment Yield Ranges Over Last Year

 

US TreasuriesFHLB Agency BulletsMortgage Backed SecuritiesMunicipalsUS Corporate - FinancialsUS Agency Swap Rates 

Source: Bloomberg

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

Download / Print as a PDF