The big question of the day is, will the Fed pause?
The even bigger question is, if so, when?
On November 9th in my Diary piece titled Diary Week 66: What Will Ja DECide? I pontificated that
"the first observation I will make is that Jay said any policy decisions would likely be impacted only by legislation put in place rather than projected. I would respectfully disagree with him on that. A Red Sweep makes it a virtual certainty that we will very quickly see those stated Fiscal and regulatory policies put in place." Do you really want to keep cutting rates on the basis of what you are seeing today when you know full well what is coming around the corner? These policies will undoubtedly be a shot in the arm to economic activity that was largely not entertained as recently as last week."
I also noted that "I hear a lot of people saying that Jay was dovish last week and again I respectfully disagree."
At the Fed press conference he clearly noted that the Fed's dual mandate was back in play. Despite that there was no way that the day after the election outcome (President, House and Senate) had become increasingly clear and obvious) that he could strongly guide to a shift. It would have looked way too political after having made the 50 bp's move in September.
So, they had to cut, and they did. However, they also had to "gently" start the path to pausing- which is what Jay did.
I also said that " I find it hard to envisage the 50 bp's cut that my old colleagues at Citi are expecting especially as the inflation base effects make it a higher bar to see annualized rates falling in the next 3 months. I would personally ascribe a much greater danger of a ZERO move at this point in December than a 50 bp's move. I think what both the Fed statement and Jay's press conference provided was "cover" ie Optionality not to move in December."
Fast forward to today and the World has changed a bit in just 1 week.
From pretty much pricing a near certainty of a 25 bp's cut in December it is now being priced at 50:50 and that may still be too high. Why?
Jay was yet again at pains to point out that the dual mandate was in balance now shifting away from the main focus still being on the employment picture.
That is important because if you say both are in balance then you either need lower than expected inflation prints or worse than expected employment prints to argue for another cut . Without either of these the "Red Wave" clearly argues to stop cutting for now.
In the last week, what have we seen?
The NFIB Small Business optimism index came in higher than expected in October at 93.7. The inflation sub index was unchanged. The Employment change index and the Job openings index both rose 1 point.
CPI came in exactly as expected both in headline and Core (despite some late whispers that it would be higher- but that was a high bar given that 0.3 was expected) That is however the 3rd 0.3 in a row giving us the highest 3-month annualized run rate since March.
PPI came in higher than expected and "most importantly " Jay specifically made a point of referencing that in his economic comments on Thursday- yet another "Plank" in the "Platform Of Pause".
Initial claims came in lower than expected
Retail sales came in lower than expected but the upward revisions of the prior month were greater than the downside misses.
We obviously still have a lot of data to come but the important message is that the economic and political developments of the last week+ push back on the narrative of another cut in December.
To me that signals a shift to a situation that we need downside misses now to avoid a pause. "Meets and beats" will increasingly solidify the danger of a late shift to a December pause- the exact opposite of the last shift to a 50 bp's cut in September
December 18th is still over 1 month away but the most important numbers are likely Core PCE on 27 November, JOLTS on 03 December and of course the Employment data on 06 December. (CPI is also on 11th dec of course but Core PCE is what the Fed looks at for its inflation mandate)
Core PCE: It is going to be hard to see a topside beat given a 0.3% is expected giving us a 1/10th rise to 2.8% YOY. However one thing worth noting is that the number falling out is a relative weak 0.13%. So If we got a strong .3 (last month was a marginal .25) like the .34 in March then the YOY could feasibly come in higher at 2.9%. Such a number would also raise the 3-month annualized to a headline grabbing 3% from present 2.3%.
JOLTS are important as Jay has constantly mentioned the move close to a ratio of 1 versus total unemployed during the "softer labor market" narrative to justify the 0.5% cut.
And then there is payrolls and the employment rate. I am on record as being very sceptical about the large Government jobs number reported in the Sept household report (+785k) which was unprecedented outside of Covid. However, that number will likely stay in place for some time to come so there is no point dwelling on it right now.
I have some time ago moved away from the 2007 overlay as a comparable analog to today as price action and the backdrop today changed dramatically.
It is therefore interesting to look at a more comparable period (for now) of 2016.
Interestingly in 2016 the November unemployment rate was expected to remain unchanged at 4.9% but came in at 4.6%. Interestingly there was also a big jump in Government workers at +278k compared to a fall of 144k the prior month. (Last month Govt workers fell 103k)
In Nov. 2020 Govt jobs also rose 237k and the unemployment rate fell to 6.7% from the prior reported 6.9% (revised down to 6.8%)
What if we get another solid Govt. worker number and the employment rate gets revised lower????
Such a development, if seen, would be, I believe a "dagger in the heart" of a potential interest rate cut on December 18th
So where does that leave us?
Going into the September meeting I said that I thought Jay wanted to go 50 bp's after the shock of both a weak employment report and more importantly the prior yearly revisions lower- and he got what he wanted
I think Jay gets what he wants again.
What is that?
If these future pieces of inflation and employment data come in pretty much as expected I still think it could be 60:40 in favour of the Fed (Jay) pausing. Even if they default to a cut the press conference will make it clear that there will be no guidance to further cuts.
If the inflation (PCE) or employment (Unemployment rate) numbers come in higher/lower respectively than expected then I think it is 80:20 for a pause (maybe even 90:10)
My gut feel (that and $5- correction $6 will get you a Cappuccino) is that the Fed is NOT MOVING IN DECEMBER