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  • Markets expect Powell to stress Fed’s policy hold
  • Trump auto tariff news expected as soon as today
  • Stocks fade after President Trump says the lack of a trade deal would produce “substantially” higher tariffs
  • U.S. core CPI expected unchanged at 11-year high


Markets expect Powell to stress Fed’s policy hold
 — Fed Chair Powell today and Thursday will testify before Congressional committees in their semi-annual review of monetary policy.  Mr. Powell today will be competing for attention with the first day of the public impeachment hearings being held by the House Intelligence Committee.

The markets are expecting Mr. Powell today to reiterate the Fed’s unmistakable guidance that its policy is now firmly on hold after the three rate cuts made earlier this year as an insurance policy against downside risks.  After the FOMC meeting two weeks ago on Oct 29-30, when the Fed cut the funds rate target for the third time, Mr. Powell in his post-meeting press conference said that monetary policy was in a “good place” and that a “material reassessment” of the outlook would be necessary to justify any further rate cuts.

The markets were pleased by Mr. Powell’s additional comment in his press conference that, “we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates.”  That comment suggested that the Fed’s next rate hike is perhaps years away since inflation would have to rise above +2% for an extended period of time given that the Fed is now stressing the symmetrical nature of its inflation target.

Market expectations for Fed rate cuts have fallen substantially in the two weeks since the FOMC meeting, both because of the Fed’s guidance that no more rate cuts are expected and because the markets have become more optimistic about a US/China trade deal.

The markets are now discounting only another 27.5 bp of rate cuts through the end of 2020, which is 5.5 bp less (i.e., about 1/4 of a rate cut) than the 33 bp of rate cuts seen right after the Sep 29-30 FOMC meeting.  The market is discounting a negligible 7% chance of a rate cut at the next FOMC meeting on Dec 10-11.

Trump auto tariff news expected as soon as today — The Trump administration as soon as today may announce whether President Trump will slap a U.S. tariff on imported autos based on Section 232 national security grounds.  The markets were encouraged by reports from both Politico and Bloomberg in the past two days that Mr. Trump will delay a decision on those auto tariffs by another 6 months.

Bloomberg reported yesterday that the Trump administration is pleased that European automakers such as Volkswagen and Daimler have agreed to shift global production to American suppliers as a means to stave off the tariffs.  A 6-month delay in the tariff decision would allow the Trump administration to keep the pressure on foreign automakers to make more concessions and on EU officials for concessions in US/EU trade talks.

Commerce Secretary Wilbur Ross earlier this month said that a postponement of the tariff was likely with his comment that, “Our hope is that the negotiations we’ve been having with individual companies about their capital investment plans will bear enough fruit that it may not be necessary to put the 232 [national security tariffs] fully into effect, maybe not even be necessary to put it partly into effect.”

European autos would be the main target of a Section 232 auto tariff since Japan, South Korea, Mexico, and Canada have already been exempted from auto tariffs by larger trade deals.  Europe has promised to slap retaliatory tariffs on $39 billion of U.S. goods if Mr. Trump imposes tariffs on European autos.  Global stocks would likely fall sharply if Mr. Trump were to unexpectedly proceed with a tariff on European autos since the European manufacturing sector is already in a recession and since the U.S. economy would take another hit from retaliatory tariffs.

Stocks fade after President Trump says the lack of a trade deal would produce “substantially” higher tariffs — President Trump in his speech to the Economic Club of New York yesterday didn’t say anything that was fundamentally new.  Regarding a trade deal, he said, “we’re close — a significant phase one deal could happen, could happen soon.”  However, stocks were undercut when he also said, “If we don’t make a deal, we’re going to substantially raise those tariffs.  They’re going to be raised very substantially.  And that’s going to be true for other countries that mistreat us too.”

A US/Chinese trade deal does not seem to be imminent given last week’s conflicting reports about China’s demand for tariff rollbacks and Mr. Trump’s insistence that he hasn’t agreed to any rollback.  Since there is no date as yet for a Trump/Xi signing summit, the only real deadline for a deal is December 15 when Mr. Trump’s 15% tariff on the last $160 billion of Chinese goods is scheduled to take effect.

U.S. core CPI expected unchanged at 11-year high — Today’s Oct CPI is expected to move sideways with the headline CPI unchanged from September’s +1.7% y/y and the core CPI unchanged at +2.4% y/y.  The core CPI in September matched an 11-year high of +2.4% y/y.  However, the Fed’s preferred inflation measure, the PCE deflator, is in much weaker shape with the headline deflator at +1.3% y/y and the core PCE deflator at +1.7% y/y, both comfortably below the Fed’s +2.0% inflation target.

Market expectations for inflation have risen fairly sharply in the past month but remain comfortably below the Fed’s +2.0% inflation target.  The 10-year breakeven inflation expectations rate in the past month rose sharply by +27 bp to last Thursday’s 3-1/2 month of 1.74% from the early-October 3-year low of 1.47%.  However, the breakeven rate in the past two days has dropped slightly to 1.70% and remains well below the Fed’s +2.0% inflation target.

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