The Fed’s Next Moves Are Now Anyone’s Guess Good economic data, and the coming Trump presidency, throw everything into doubt
The Fed cut rates by a quarter point on Thursday, as universally expected and following a half-point cut in September. Markets are already dialing back bets that another reduction will follow in December. Fed funds futures prices now imply a roughly 25% chance that the Fed will leave rates unchanged at that meeting rather than cutting again, up from 14% a month ago.
Further out, the uncertainty is even greater. Take for instance Fed policymakers’ longer-term economic projections released at their September meeting. These showed expectations on average that the target policy rate would be between 3.25% and 3.5% by the end of 2025, down from a range of 4.5% to 4.75% now. That represents a significant amount of easing still to come—perhaps one more quarter-point cut in December and then four next year.
But the chance that the Fed could cut rates by just a quarter point or less between now and June 2025, for instance, stood at a not insignificant 16.9% as of Wednesday on the CME Group FedWatch tool, compared with zero chance on the day of the September meeting.
When asked about the Fed’s September projections at Thursday’s press conference, Fed Chair Jerome Powell strongly suggested that economic conditions have improved since then. “In the main, the economic activity data have been stronger than expected,” he said, citing jobs growth (excluding the October jobs report, which was distorted by hurricane impacts), retail sales and some recent revisions to a series of Bureau of Economic Analysis data.
“I think you take away a sense of some of the downside risks to economic activity having been diminished,” he said. (…)
The Fed has taken some of the pressure off markets with a cumulative reduction in rates of three quarters of a point. How much more relief will be coming, and when, is now very hard to forecast.
Also:
Powell said it was too soon to say how the next administration’s policies would reshape the economic outlook.
“We don’t guess, we don’t speculate, we don’t assume” what policies will get put into place, Powell said.
Really? Remember “transitory”, “the long and varying lags”, rentflation, “the neutral rate”.
Ed Yardeni’s smart assessment:
[Powell] stated a few times that he and his colleagues on the FOMC believe that monetary policy remains restrictive since the FFR is still above its mystical “neutral” level. He did not explain, nor did any reporter ask him to explain, how they know that monetary policy is restrictive if the economy is doing so well, when he also said that economic growth could be even stronger next year!
In his opening remarks, he said, “We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment.”
Notice that he is implying that the FOMC is committed to lowering rates, the only question is how fast. He did say that given the strength of the economy, there’s no rush to lower the FFR. So at his latest presser, Powell stuck to his ultra dovish pivot which he first signaled in his August 23 Jackson Hole speech: The Fed will be cutting interest rates for the foreseeable future.
Powell said the Fed is trying to find the middle path between the risk of cutting the FFR too quickly thus undermining progress on inflation, or cutting too slowly and allowing the labor market to weaken too much. In either case, rates are being lowered. The only question is how quickly. (…)
Powell acknowledged that the economic numbers since then have been stronger than expected. One might question why an additional rate cut was needed if the economy is in fact in better shape today than it was at the Fed’s last meeting? What’s the rush, if there is supposed to be no rush? (…)
Ignore the Headline Miss—Productivity Firming This Cycle
Nonfarm labor productivity, defined as output per hour worked, increased at a 2.2% annualized rate in the third quarter. The outturn was a bit less than expected and comes on the heels of a downward revision to the prior quarter (2.1% from 2.5% previously) that was largely driven by a lower measure of output during the quarter. Incorporating the revisions, nonfarm labor productivity was 2.0% year-over-year in Q3.
Despite the third quarter’s miss and downward revision to the prior quarter, the trend in worker efficiency continues to look solid. Recent benchmark revisions to GDP showed stronger nonfarm output in recent years, which has led labor productivity to grow at an average annualized rate of 1.8% since the pandemic, up from a prior estimate of 1.6% and the past business cycle’s 1.5% average (2007–2019).
Relative to Q4-2019, real output of the nonfarm business sector has expanded 12% while hours worked have increased a more modest 4%. The differential suggests that workers are finding a way to produce more with less, and early evidence from the Bureau of Labor Statistics points to the broader adoption of remote work as one key factor.
Source: U.S. Department of Labor and Wells Fargo Economics
Firming labor productivity growth is important in quelling the labor market’s inflationary impulse. Compensation per hour worked increased at a 4.2% annualized rate in Q3. This measure tends be more volatile than other measures of compensation, such as the Employment Cost Index, which showed a more benign pace of labor cost growth in Q3. Nominal labor costs are a significant input to production, yet from the perspective of inflation pressures, compensation per unit out output is what matters. In that regard, unit labor costs (ULCs) were running at a 1.9% annualized pace in Q3.
The choppiness in labor productivity growth can make discerning a trend in unit labor costs difficult. When we smooth annual growth with a four-quarter moving average, ULCs were 3.0% in Q3, a notable pickup from the prior published reading of 1.2% that preceded the Bureau of Economic Analysis’ upward revisions to income and thus compensation.
Unit labor cost growth will likely be revised back down at least somewhat once benchmark revisions to the Current Establishment Survey are finalized (the preliminary estimates show 818K fewer workers on the payrolls in March 2024, pointing to lower aggregate hours worked). However, piecing together the upwardly revised pace of labor productivity growth and still strong ULCs, we suspect the FOMC will ease monetary policy at a more gradual pace in the coming months.
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Economics
Wage Growth Tracker Was 4.6 Percent in October
The Atlanta Fed’s Wage Growth Tracker was 4.6 percent in October, down slightly from 4.7 percent in September. For people who changed jobs, the Tracker in October was 4.7 percent, down from 4.9 percent in September. For those not changing jobs, the Tracker was unchanged at 4.6 percent in October.
FYI, services wages were up 4.8%, up from 4.6% in August.
China Extends Lifeline to Local Governments but Holds Off on Big Stimulus Investors had been hoping for a large-scale effort to revive the country’s economy
China’s top legislative body gave its green light for local governments to swap some of their mounting off-balance-sheet debts but stopped short of new fiscal stimulus measures to revive the struggling economy.
After a five-day meeting, the Standing Committee of the National People’s Congress on Friday approved the issuance of 6 trillion Chinese yuan worth of local government special-purpose bonds, equivalent to about $837 billion, to replace off-the-books debt that had piled up over the years to levels that have worried many economists.
The newly-approved debt, to be issued over the course of three years, will bring the upper limit of outstanding local-government special-purpose bonds to 35.52 trillion yuan by the end of 2024, Xu Hongcai, a deputy director of the NPC Financial and Economic Affairs Committee, said during a briefing on Friday.
Separately, Chinese Finance Minister Lan Fo’an said at Friday’s briefing that, over the next five years, local governments will be able to tap an additional 4 trillion yuan worth of special-purpose bonds—originally mainly issued for infrastructure projects—to replace off-the-book debts.
Collectively, officials say that the measures would replace 10 trillion yuan worth of so-called “hidden debt” at the local government level, which Lan said stood at 14.3 trillion yuan at the end of 2023—though many private economists put the real figure at somewhere between the equivalent of 50 trillion yuan and 79 trillion yuan.
The debt was raised over many years by China’s local governments, primarily through affiliated financing vehicles, to fund infrastructure spending. Friday’s measures would put some of these hidden debts explicitly onto government balance sheets.
The long-awaited press conference was conspicuously silent, however, on expected measures to issue special treasury bonds to replenish capital levels at Chinese banks, as well as special-purpose bonds to support the country’s struggling property sector. Investors and economists had been expecting such measures in the weekslong run-up to Friday’s press conference. (…)
Steven Madden Ltd. is accelerating plans to shift production out of China after Donald Trump’s victory in the US presidential election raised the odds of increased tariffs on imported goods.
The shoe retailer now aims to reduce goods manufactured in China by 40% within the next year, up from its prior target of a 10% reduction.
“As of yesterday morning, we are putting that plan into motion,” Chief Executive Officer Edward Rosenfeld told analysts on an earnings call Thursday.
Yesterday, I posted about Breville and a few other companies also planning such moves.
And BTW, Rosenfeld said Steve Madden is exploring a move to “countries like Cambodia, Vietnam, Mexico, Brazil.” He didn’t mention the U.S. as a possible place of production.
One of China’s largest hedge funds advised some clients to pocket gains as Donald Trump’s return to the White House increases risks to the Asian nation’s economy and markets.
Shanghai-based Perseverance Asset Management, which manages more than 100 billion yuan ($14 billion), suggested that investors in a range of products run by its star fund manager Deng Xiaofeng should consider redeeming, according to a notice sent to distributors seen by Bloomberg. (…)
Perseverance Asset’s holdings in 35 mainland-listed companies where it was among the largest 10 shareholders of circulating stocks totaled 40.6 billion yuan as of June 30, according to filings data compiled by Shenzhen PaiPaiWang Investment & Management Co. (…)
China Wants a Deal With Trump, Foreign Ministry Adviser Says
“For the Chinese side a deal is desirable,” said Wu Xinbo, director at Fudan University’s Center for American Studies in Shanghai, who led a group of experts in China’s Foreign Ministry to meet politicians and business executives in the US earlier this year. “We don’t want to have a trade war.”
“We all understand Trump’s style — he will try to utilize his leverage to keep pushing China,” Wu told Bloomberg on the sidelines of the Caixin summit in Beijing. “It takes time, and it takes wrestling between the two sides.” (…)
He said a face-to-face meeting between the two leaders should be arranged as soon as possible, preferably before Trump’s inauguration on Jan. 20, 2025.
“We need to get a sense of what’s on his mind,” Wu said, adding that the two sides need to start addressing each other’s concerns. (…)
Since Chinese officials rarely veer off the official script, the comments from Wu — an influential voice on relations between the world’s biggest economies — offer a glimpse into how Beijing is viewing Trump’s comeback. Foreign Ministry spokeswoman Mao Ning told reporters on Wednesday that China’s policy toward the US is consistent and will continue to be handled “with the principles of mutual respect” and cooperation. (…)
Trump’s victory represents more of a challenge than an opportunity, Wu said. That’s not just because of his style, but also because some of the names mentioned for his administration can’t be considered “rational hawks,” making for more difficult negotiations this time around.
If a trade war does erupt, Beijing would have no choice but to respond and retaliate, Wu said.
“I hope this time our approach will be more effective,” he added.
WORTH LISTENING
Stan Druckenmiller is always worth one’s time:
https://open.spotify.com/episode/54MvqynUyejRkRsFDIvdHg?si=awlMBFXCSMSpLUpju1JEPA