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FED: 50's Out For Nov, But Still On Course For Back-To-Back 25s (1/2)

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Markets have been swift to price out a 50bp November rate cut after September's employment report came in much stronger than expected - in addition to revisions that recast the summer's weak hiring in a much more positive light. Indeed, November implied pricing has even dipped a little below 25bp, suggesting potential for a rate hold.

  • That's even before the Nov 1 release of October payrolls, which had previously been seen as the key to determining the size of November's Fed move of either 25bp or 50bp - either way, 50bp the following week looks out of the question now.
  • As for a hold, that will require more evidence, perhaps substantially so. If anything, the payrolls report was an outlier in the broader labor market context. We suspect dovish-leaning FOMC members (which include Chair Powell) will highlight thhe signal from broader measures, such as the Kansas City Fed's Labor Conditions Index (which includes data ranging from JOLTS to Challenger job cuts and showed negative momentum in August) as a pretext to keep "recalibrating" rates.
  • Powell this week said that "we do not believe that we need to see further cooling in labor market conditions to achieve 2% inflation."
  • But for its flaws, the monthly Employment Situation is the main labor market data point the FOMC looks at - and the only relevant labor component in the economic projections is the unemployment rate.
  • The September projections saw Q4 averaging 4.4% - we go into the quarter with September having printed 4.05%, which means that barring a massive jump, the forecast is already looking stale. The "low" projection on the FOMC for Q4 was 4.2%.
  • That alone warrants a reconsideration of the rate path for which the FOMC median was for another 50bp in cuts total in Nov and Dec. Powell noted this week that - while the Committee was in no hurry to cut rates quickly - the Dot Plot implied the default was indeed for two 25bp cuts at the next two meetings, "if the economy performs as expected".
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Markets have been swift to price out a 50bp November rate cut after September's employment report came in much stronger than expected - in addition to revisions that recast the summer's weak hiring in a much more positive light. Indeed, November implied pricing has even dipped a little below 25bp, suggesting potential for a rate hold.

  • That's even before the Nov 1 release of October payrolls, which had previously been seen as the key to determining the size of November's Fed move of either 25bp or 50bp - either way, 50bp the following week looks out of the question now.
  • As for a hold, that will require more evidence, perhaps substantially so. If anything, the payrolls report was an outlier in the broader labor market context. We suspect dovish-leaning FOMC members (which include Chair Powell) will highlight thhe signal from broader measures, such as the Kansas City Fed's Labor Conditions Index (which includes data ranging from JOLTS to Challenger job cuts and showed negative momentum in August) as a pretext to keep "recalibrating" rates.
  • Powell this week said that "we do not believe that we need to see further cooling in labor market conditions to achieve 2% inflation."
  • But for its flaws, the monthly Employment Situation is the main labor market data point the FOMC looks at - and the only relevant labor component in the economic projections is the unemployment rate.
  • The September projections saw Q4 averaging 4.4% - we go into the quarter with September having printed 4.05%, which means that barring a massive jump, the forecast is already looking stale. The "low" projection on the FOMC for Q4 was 4.2%.
  • That alone warrants a reconsideration of the rate path for which the FOMC median was for another 50bp in cuts total in Nov and Dec. Powell noted this week that - while the Committee was in no hurry to cut rates quickly - the Dot Plot implied the default was indeed for two 25bp cuts at the next two meetings, "if the economy performs as expected".