What’s that I hear? It sounds as though hopes for a 50-basis point rate cut next week are taking a tumble.
This morning’s CPI had the potential to be a bit of an afterthought after Friday’s jobs report. We all know that the Core PCE Deflator is the Fed’s preferred inflation measure, and besides, it’s no longer all about inflation for the Fed. During his recent speech at Jackson Hole, Chair Powell reminded listeners that after years of focusing on the “stable prices” half of the Federal Reserve’s dual mandate, the central bank would now be taking the other half, “maximum employment” into greater consideration. A rate cut at next week’s FOMC meeting was all but assured.
In their usual pattern, traders were understandably hopeful that could bring about more aggressive cuts than the Fed was hinting. Remember, we begin the year with expectations for six to seven cuts. And once again, events conspired to dash most of those hopes.
After last week’s disappointing report, expectations were essentially a coin flip between 25 and 50 bp cuts. In a media appearance, I pushed back on the notion of more aggressive cuts, noting that average hourly earnings rose faster than expected in August (0.4% vs. 0.3% consensus and 0.2% in July). And while markets were understandably focused on CPI Ex-Food and Energy rising by a more-than-expected 0.3% (vs. 0.2% consensus and previous), there was far less attention paid to the fact that Real Average Earnings rose considerably more than last month on both an Hourly and Weekly basis (1.3% and 0.9% respectively, vs last month’s 0.7% and 0.4% respectively).
It is extraordinarily hard to make the case that the labor market is collapsing when wages continue to grow smartly. It also makes it harder to make the case that prices are firmly under control. Throw in the Fed’s typically unwillingness to surprise markets or take actions that could be perceived as overtly political, and we find it hard to believe that anything other than 25 bp is the likely outcome for the upcoming FOMC meeting.
Meanwhile, the intraday volatility continues. After a morning when stocks gave back most of the gains that they recouped this week, the dip buyers returned once again. And once again, once a rally or a bounce starts, people either jump on the bandwagon or sidestep the advance:
SPX 4-Days, 2-Minute Candles
Source: Interactive Brokers
Meanwhile, 2-Year Treasuries also lack direction. Though they have steadily advanced since Jackson Hole, they have demonstrated surprising volatility of their own. Today’s trading is not as jumpy nor is the range as wide as we saw on Friday, but it is still quite volatile, nonetheless. Remember our frequently offered comment: if you can’t price risk-free assets [in this case, Fed Funds or 2-year notes], how can you expect to do so for stocks?
2-Year US Treasury Futures, December Expiration, 2-Weeks, 5-Minute Candles
Source: Interactive Brokers
Disclosure: Interactive Brokers
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