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At a Crossroads

29 October 2019 by jbchevrel

The FOMC has started its October meeting today, and they will communicate on it tomorrow. This is arguably the big one for credit indices, although we also get we get the ADP data (Wed), manufacturing PMI/ISM, employment report (Fri). That’s for the US, we also get Chinese PMI (Thu early AM) and Caixin PMI (Fri early AM). The consensus thinks they will cut -25bp for the 3rd time this year to a range of 1.50-1.75%, as it is priced in, in the $ OIS market (~23bp). Since the last meeting, Fed speakers (and in particular chair Powell and vice chair Clarida) failed to push back against the $OIS-evidenced market expectations for a single rate cut at this meeting. On top of that, Fed speakers continued to highlight the downside risks to their outlook. While none challenges what the outcome of this meeting will be, some note that there is room for a hawkish surprise, as far as the post-meeting statement is concerned. It seems fair to say that the October statement could be more hawkish, or more accurately less dovish than the ones of July and September, in particular. A first simple reason behind that is that we will have had 3*25 rate cuts, and that surely somehow balance the risks to the outlook. The last three statements (June/July/Sept) contained 1/ “uncertainties about the outlook” 2/ keen “to act as appropriate to sustain the expansion.” The statement could say that 1/ is offset by the 3 cuts we have had so far. But 2/ seems more likely to stay. Markets seemingly don’t expect a removal of 2/, and importantly 2/ keeps the door open for one more cut either in December 2019 or during Q1 2020. 2/ thus gives them an option, which is probably what they will go for, given we have key events before the December meeting. We have the APEC meeting in Chile next month (where markets expect a phase 1 US-CN deal to be signed), we might get more clarity on Brexit and on some of the EM ongoing risks. For the rightly small minority who thinks the Fed is still data dependent, I must note that since the September meeting, both inflation & long-term inflation expectations have fallen by a tad. Lastly, we could see dissenters again at this meeting. George & Rosengren seem likely to not back another rate cut here, and less likely but also possible, Bullard might dovishly dissent again for a double 50bp cut.