- Powell confirms policy hold but says there are still “noteworthy risks”Â
- WSJ says US/China trade deal hits a snag on ag purchases
- Trump auto tariff decision expected soon
- U.S. PPI expected to fall to 2-3/4 year low
Powell confirms policy hold but says there are still “noteworthy risks” — Fed Chair Powell yesterday in testimony to the Joint Economic Committee of Congress reiterated his recent themes and didn’t say anything particularly new or market-moving. Mr. Powell will appear today before the House Budget Committee and will undoubtedly repeat yesterday’s themes, although questions from House members could draw out some potentially market-moving news.
Mr. Powell yesterday confirmed that Fed policy is on hold for the time being by saying, “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”
That comment, however, leaves open the possibility for another rate cut should the economy take a significant turn for the worse since Mr. Powell added that “noteworthy risks to the outlook remain.” Mr. Powell said that the Fed would respond “If developments emerge that cause a material reassessment of the outlook.”
The main risks noted by Mr. Powell were “sluggish growth abroad and trade developments.” If the U.S. and China reach a phase one trade agreement within the next several weeks and there are no new tariffs, then the U.S. economy is likely to remain stable and no further Fed rate cuts may be necessary. However, if the phase-one trade deal suddenly collapses and Mr. Trump moves ahead with the Dec 15 tariffs and possibly imposes other tariffs, then the Fed will come under renewed pressure for another rate cut. Another key trade risk is whether Mr. Trump slaps tariffs on imports of EU autos, which would worsen the manufacturing recessions in Europe and the U.S.
The federal funds futures curve turned mildly more dovish in response to Mr. Powell’s appearance on Wednesday. The late-2020 futures contracts eased by 3-4 bp and the late 2021 contracts eased by 4.5 bp. The markets are now discounting another -31.5 bp of easing (i.e., 1.3 rate cuts) through the end of 2020. The market is discounting a negligible 8% chance of a rate cut at the next FOMC meeting on Dec 10-11.
WSJ says US/China trade deal hits a snag on ag purchases — The U.S. stock market on Wednesday afternoon was undercut by a Wall Street Journal report saying that the US/China trade deal has hit a snag because China is reluctant to put numerical targets for ag purchases into the text of a trade deal.
President Trump has said that China has agreed to ramp up its U.S. ag purchases to $50 billion from the $20 billion level seen in 2017, the last full year before the tariff war began. The markets on Wednesday remained nervous about a US/China trade deal after President Trump in his NY speech on Tuesday said that tariffs on China will be raised “substantially” if there is no phase one trade deal.
Trump auto tariff decision expected soon — President Trump yesterday said that he has been fully briefed and will decide soon on whether to impose tariffs on U.S. auto imports. The markets earlier this week were encouraged by reports from both Politico and Bloomberg that Mr. Trump has decided to delay a decision on those auto tariffs for another 6 months. Bloomberg reported Tuesday 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 tariff.
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 tariff] fully into effect, maybe not even be necessary to put it partly into effect.”
Europe has promised to slap retaliatory tariffs on $39 billion of U.S. goods if Mr. Trump imposes a tariff on European autos. Global stocks would likely fall sharply if Mr. Trump unexpectedly proceeds 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.
U.S. PPI expected to fall to 2-3/4 year low — The market is expecting large declines in today’s PPI report. The consensus is for today’s Oct final-demand PPI to ease to a new 2-3/4 year low of +0.9% y/y from Sep’s +1.4% y/y. The consensus is for today’s Oct core PPI to ease to a new 2-1/2 year low of +1.5% y/y from Sep’s +2.0% y/y.
Yesterday’s CPI report was mixed with the headline Oct CPI rising slightly to +1.8% y/y from Sep’s +1.7%, but with the core CPI easing to +2.3% y/y from Sep’s +2.4%.
The U.S. inflation outlook remains tepid. The Fed’s preferred inflation measure, the PCE deflator, is in tepid 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.
Meanwhile, 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 high of 1.74% from the early-October 3-year low of 1.47%. However, the breakeven rate in the past several sessions has dropped mildly to 1.68% and remains well below the Fed’s +2.0% inflation target.
