Fed rate-hike odds rise to new high as John Taylor surges in the Fed-chair sweepstakes
Sep U.S. industrial production expected to remain weak due to hurricane disruptions but industry confidence remains high
Oct NAHB U.S. housing market index expected to stabilize after Sep’s drop
U.S. import prices expected to keep upward pressure on headline inflation
Fed rate-hike odds rise to new high as John Taylor surges in the Fed-chair sweepstakes — The odds on Monday for a December rate hike rose to a new high of 92% from 86% last Friday, according to the Jan 2018 federal funds futures contract. Monday’s more hawkish view of Fed policy was the result of weekend comments by Fed Chair Yellen in which she said she expects inflation to move higher next year and that the Fed needs to stick to its policy of gradually increasing interest rates.
Monday’s more hawkish view of Fed policy was also sparked by a Bloomberg report that President Trump has “gushed” about Stanford economist John Taylor since he was interviewed last Wednesday. In that same article, Bloomberg also quoted sources as saying that former Fed Governor Kevin Warsh’s star has faded in the White House due to his lack of academic credentials in economics. Mr. Warsh has a Harvard law degree and experience as a Fed governor, but he does not have the PhD in economics that most Fed chairpersons have had in the past.
The markets are wary of Mr. Taylor since he created the Taylor Rule for monetary policy, which would peg the funds rate under current circumstances substantially higher than current levels, e.g., at around 3%. However, Mr. Taylor in last week’s interview may have convinced Mr. Trump that he would not favor a sharp near-term hike in interest rates or else Mr. Trump would probably not have “gushed” about him after the interview.
Mr. Trump has called himself a “low interest rate person.” Mr. Trump is not likely to knowingly choose a Fed chair who would sharply increase interest rates, which would run the risk of causing a recession and political damage for Republicans in coming elections. Mr. Taylor at a Boston Fed conference last week said that he didn’t think “rules should be used as a way to tie central bankers’ hands.” That appeared to be a claim that he is more flexible and dovish than the Taylor Rule might imply.
Meanwhile, Politico on Monday reported that President Trump will interview Ms. Yellen for the Fed chair job this week but that the interview could slip until next week depending on the president’s schedule. It is not clear whether there is anyone else that President Trump wants to interview for the job after Ms. Yellen. It is possible that Mr. Trump could make an announcement on the new Fed chair as soon as this week after he interviews Ms. Yellen. This is week three since Mr. Trump said on Sep 29 that he would make an announcement in 2-3 weeks, although White House Chief of Staff Kelly last week said that a decision is still “some time away.”
The betting odds for Mr. Taylor to become the next Fed chair jump sharply by 12 points to 21% on Monday from 9% over the weekend, while Mr. Warsh’s odds dropped by -6 points to 20%. Fed Governor Jerome’s Powell’s odds dropped by -5 points to 38%, but he remains the leader versus Taylor at 21%, Yellen at 20%, and Warsh at 20%. Cohn (7%) and Kashkari (7%) remain unlikely choices.
Sep U.S. industrial production expected to remain weak due to hurricane disruptions but industry confidence remains high — The market consensus is for today’s Sep industrial production report to rebound mildly by +0.2% after the sharp -0.9% drop seen in August on Hurricane Harvey. However, the hurricane effects are expected to continue to dampen utility and manufacturing output in September due to the heavy flooding from Harvey (Aug 25 landfall) and due to Hurricane Irma that hit Florida on Sep 10. Isolating the manufacturing sector, today’s Sep manufacturing production report is expected to edge higher by +0.1% after Aug’s -0.3% drop.
Despite the hurricane disruptions, confidence in the manufacturing sector remains strong. The ISM manufacturing index in Aug-Sep rose by a combined +4.5 points to post a 13-year high of 60.8. Meanwhile, the ISM manufacturing new orders index in September rose by +4.3 points to 64.6, which was only -0.5 points below the 8-year high of 65.1 posted in February. The U.S. manufacturing sector is seeing support from firm U.S. economic growth, improved oversees economic growth, and improved U.S. exports tied to this year’s sharp drop in the dollar.
Oct NAHB U.S. housing market index expected to stabilize after Sep’s drop — The market consensus is for today’s Oct NAHB housing market index to be unchanged at 64, stabilizing after September’s -3 point decline to that level. The index posted a 12-year high of 71 in March and remains in strong shape at only -7 points below that high.
U.S. home builder confidence took a bit of a hit in September due to hurricane damage. However, home builder confidence should recover as home building operations return to normal and as demand surges for rebuilt homes. Aside from hurricane disruptions, home builder confidence remains strong due to solid new home sales and high new home prices.
U.S. import prices expected to keep upward pressure on headline inflation — The market consensus is for today’s Sep import price index to rise to +2.6% y/y from Aug’s +2.1%, which will keep upward pressure on the headline U.S. inflation statistics. U.S. import prices are being driven higher by the July-Sep rally in crude oil prices and by this year’s sharp decline in the dollar, which has put pressure on importers to raise prices. Excluding petroleum, today’s Sep import price index is expected to be unchanged from August at +1.0% y/y.