This week—while holiday shoppers were stocking up on Cyber Monday deals across America — the financial Masters of the Universe were playing a game of “Musical Chairs” …
I’m talking about the Federal Reserve’s Board of Governors, and how a few key members seem to be switching proverbial seats and changing their tone in favor of a rate cut this December.
It’s a difficult call to make, because the recent government shutdown put a kibosh on all official data releases. So these Fed governors have been essentially flying blind in terms of gauging the health of the economy and the jobs market.
But a few key developments this week are stacking the odds in favor of a boost for the economy. And today, I’d like to share my thoughts on what this might mean for your portfolio.
Let’s dive in…
Video transcript:
Welcome to Moneyball Economics. I’m Andrew Zatlin.
The question to ask and answer is, next week on Tuesday and Wednesday, when the Fed meets again, will they cut interest rates? It all comes down to what they’re seeing in the economic data, and that’s what we want to talk about today.
Now, if you ask the marketplace, the marketplace has shifted views many times over the past couple of months. Pretty dramatically too.
About two months ago, the market was dead certain, a hundred percent odds that we would see a rate cut, but then those odds fell down to 30%. About a month ago, there wasn’t going to be a rate cut.
Suddenly overnight, the odds have shifted again, the odds of a rate cut are back above 80%. Well, what triggered that? It was triggered by a speech by the New York Federal Governor Williams. He came out about a week ago and he said, look, I’m comfortable with a rate cut in December.
This is important for a couple of reasons.
One of which is it says that the Federal Reserve isn’t going to punt.
They’re not going to say, Hey, we don’t have economic data. Let’s wait another month. That was my main concern, and it’s no longer there. That means they are going to make a decision and if they’re going to make a decision, it’s on the basis of economic data.
So the question is, what did William see a week ago that made him say, I’m comfortable with a rate cut? Because this is the reason that the market changed their view. He’s a hawk. See, he’s a hawk who suddenly became a dove.
And if you’re the marketplace, ignore the economic data and let’s just go practical. There are 12 voting members next week. Five of them are known doves, meaning they are in favor of a rate cut, seven of them known hawks, not in favor of a rate cut, or at least there were seven until Williams jumped ship and he joined Team Dove.
Now it’s evenly split 6 for, 6 against a rate cut. All you need to do is flip another hawk and you’ve got your rate cut, and that’s what the marketplace expects and it all comes down again to the economic data.
Right now, we’ve got problems with the economic data. It’s skimpy. We don’t have a lot of the economic data and we won’t get it between now and the decision next week. But what data we do have, unfortunately it’s also obsolete. It only goes through September and we’re standing here in December.
I think Williams is comfortable with taking the September data and saying, look, this is trend. Whatever happened in October, November, it was not positive we had the shutdown.
So we can start with September and say, this was probably the best it’s been in a few months, so let’s use what we have. And at that point in time, the only data that we had for September payroll data payrolls came out. The private sector created 97,000 jobs, not very strong.
And that’s what Williams needed to see for him to say, you know what? I think we’re in a soft patch. I don’t think that soft patch got any firmer. Let’s do a ray cut. We can handle it. That’s where he was.
Now since then, we’ve got some additional economic data. So first of all, we’ve got more labor data in the form of jobless claims and they’ve been firming up. They’re pretty low. In fact, jobless claims are at a level that is commensurate with an expanding economy.
However, I think Williams is dismissing this possible labor strength signal. I think he’s looking at the jobless claims and saying they’re low because everyone’s been fired. Who’s going to get fired? It’s not that they’re low because the economy’s expanding and demand for workers is strong. It’s just that we’re kind of circling the airport.
There’s no reason to fire just as there’s no reason to hire again, soft patch, but we’re also going to get some additional data. For example, we’re going to get another jobless claims report this Thursday, but it’s Friday That I think is going to be important. Labor market’s huge, but so is the inflation story. Now, as we go into next week, we’ve already gotten one side of the inflation story and that was in the form of producer inflation.
Now remember, everyone’s been concerned and nervous about what’s going on with tariffs and the impact on inflation, a lot of uncertainty. Well through September, we’ve got visibility now, so that’s about six months of tariff impact, five months.
And the data shows that there really is no inflation impact. PPI was very mild, no change. And so as a result, if you take that and then two months of soft economic patch inflation probably didn’t go up that much.
And this Friday we’re going to get a sneak peek of the consumer side of life in the form of what’s called PCE or personal consumption expenditures. This is a data point that the Fed likes to use in addition to CPI to track inflation.
Anyway, suffice it to say that next Tuesday the fed’s going to have visibility to the labor market where they’re probably going to say it’s not that strong. They’re going to have an inflation signal in the form of PPI. That’s going to say inflation’s not really a huge problem, and then they’re going to get kind of sort of a proxy for consumer inflation.
All this data is going to add up to say, Hey, there’s no red flag that should say, don’t do a rate cut. There is a lot of signals that say the economy’s slow and soft, go ahead and do a rate cut.
So I believe we’re going to get one more hawk to change sides. We are going to get a rate cut. And again, I was against the view that we get a rate cut because I thought the Fed might kick the can Williams is saying, we’re not kicking the can.
So how to play this…
Remember, there are a lot of expectations of rate cuts. I’m going to go ahead and say we’re going to get the rate cut, and so therefore you want to be long and strong in the markets right now. You really want to put your bets down. We’re going to get a Santa Rally.
Folks, we really are in it to win it. Zatlin out.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics