- US/Chinese trade deal timing could slip as APEC Summit is canceled
- Markets take hawkish Fed cut in stride
- Core inflation expected to ease slightly
- U.S. personal income and spending expected to be solid
- ECI expected to show continued strength
US/Chinese trade deal timing could slip as APEC Summit is canceled — Chile on Wednesday canceled the APEC Summit in Santiago for Nov 16-17 due to the recent protests that have rocked the country. The APEC organizers apparently have no backup location in mind and they apparently intend to cancel the summit altogether.
The U.S. and China on Wednesday offered no alternative venue where Presidents Trump and Xi could sign a phase-one trade deal. The White House released a statement simply saying, “We look forward to finalizing Phase One of the historic trade deal with China within the same time frame, and when we have an announcement, we’ll let you know.”
The lack of any explicit deadline for a phase one trade deal could easily cause the US/Chinese negotiations to slow down. Even before yesterday’s cancellation of the APEC summit, Reuters on Tuesday cited a Trump administration official as saying that the trade deal might not be ready in time for the APEC summit.
The markets will be watching to see if the negotiations start slowing, or whether the U.S. and China might set a new deadline with a proposed bilateral summit between Presidents Trump and Xi. The only real deadline at this point is December 15, when President Trump plans to slap a 15% tariff on the remaining $160 billion of Chinese goods.
Treasury Secretary Mnuchin on Wednesday told Reuters that he does not yet have a recommendation for the President on the Dec 15 tariff. However, China undoubtedly expects the Dec 15 tariff to be scrapped in return for its concessions in a phase one trade deal.
Markets take hawkish Fed cut in stride — The markets yesterday generally took in stride the Fed’s suggestion that yesterday’s rate cut might be its last. The markets were apparently braced for even more hawkish language, meaning that the net outcome of the meeting was slightly dovish relative to market expectations. In line with unanimous market expectations, the FOMC yesterday cut its funds rate target by -25 bp to 1.50/1.75% and cut the IOER rate by -25 bp to 1.55%.
As it happened, all the Fed did was dial back its post-meeting language by removing the phrase that the Fed “will act as appropriate to sustain the expansion,” and replacing it with the neutral statement that it will simply assess “the appropriate path” for the funds rate target. In addition, Fed Chair Powell said, “We believe monetary policy is in a good place,” which suggests the Fed believes that no further rate cuts are necessary unless the situation deteriorates.
On the dovish side, T-note prices rallied and the dollar dropped when Mr. Powell in his press conference said, “we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates.”
In any case, the markets on Wednesday generally ignored the hawkish elements of the Fed comments. In fact, the federal funds futures curve actually turned more dovish by 2-3 bp for the early 2020 contracts and by 5 bp for the late-2020 contracts.
The market is now discounting a 46% chance of a Fed rate cut at its next meeting on Dec 10-11 (relative to the new target mid-point of 1.625%) and a 64% chance of that rate cut by the following meeting on Jan 28-29, slightly stronger odds than before the FOMC meeting. The market is discounting an additional 33 bp of easing (i.e., 1.3 rate cuts) by the end of 2020, according to the Dec 2020 federal funds futures contract.
Core inflation expected to ease slightly — The consensus is for today’s headline Sep PCE deflator to be unchanged from Aug’s +1.4% y/y, but for the core PCE deflator to ease slightly to +1.7% from the Aug’s 7-month high of 1.8%. The markets are hoping that today’s core PCE deflator will cool a bit considering that the series showed a large +2.5% gain in August on a 3-month year-on-year basis. The Aug deflators of +1.4% headline and +1.7% core were still comfortably below the Fed’s +2.0% inflation target.
Today’s PCE deflator report will finalize the inflation data for September. The Sep CPI was unchanged from August at +1.7% y/y headline and +2.4% y/y core. The Sep final-demand PPI eased to +1.4% y/y from Aug’s +1.8%, while the core PPI fell to +2.0% y/y from Aug’s +2.3%.
Regarding market-based expectations for inflation, the 10-year breakeven inflation expectations rate has fallen back in the past two sessions to 1.59% from Monday’s 6-week high of 1.67%. The market is expecting inflation to average just +1.67% over the next ten years, which is well below the Fed’s +2.0% target and gives the Fed plenty of room to justify its three rate cuts seen thus far.
U.S. personal income and spending expected to be solid — The market consensus is for today’s Sep personal income and spending reports to both be solid at +0.3% m/m following Aug’s report of +0.4% and +0.1%, respectively. Yesterday’s Q3 GDP report of +1.9% showed that the U.S. economy continues to be supported by personal spending, which showed a solid gain of +2.9% in Q3.
ECI expected to show continued strength — The consensus is for today’s Q3 employment cost index to show an increase of +0.7% q/q (+2.8% annualized) after Q2’s +0.6%. The ECI, the broadest measure of employment costs, indicates that employee compensation is relatively strong, which is positive for consumer spending but negative for corporate profits.
