Asian stocks were down this morning and Europe was flat, but investors in U.S. Equities were ignoring all that in renewed hopes that the U.S. Federal Reserve will cut interest rates in December, thus fueling asset markets with a new round of cheaper money. Nasdaq 100 futures were up 0.46% this morning, premarket. S&P 500 futures were up 0.25%, after the index closed up 0.98% on Friday.
TL;DR
- U.S. Equities rose on hopes of a December Federal Reserve interest rate cut.
- New York Fed President John Williams signaled increased downside risks to employment.
- Analysts believe Williams' comments strongly suggest a December rate reduction.
- Markets now price in a higher probability of a Federal Reserve rate cut.
The financial markets appeared to conclude last week that a rate reduction in December was no longer a possibility. By Wednesday, the CME Fedwatch futures index indicated only a 30% likelihood of a cut. JPMorgan issued a report forecasting a cut in January instead. This led to a significant market decline, with the S&P 500 experiencing a 2% drop over the week. Fears of a bubble in AI didn’t help, either.
Today speculators put the probability of Fed Chairman Jerome Powell delivering a rate cut at 75.5%.
What changed?
On Friday, the president of the New York Fed and FOMC vice chair, John Williams gave a speech, spoke in a way that strongly suggested a rate cut is likely next month.
“My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat,” he said. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.”
The Federal Reserve operates with two primary objectives: fostering employment and managing inflation. Up until Friday, it appeared these two goals were in near-perfect equilibrium, indicating the Fed would likely maintain current interest rates in December.
Not anymore.
Although the U.S. Government shutdown complicated the acquisition of employment figures, the general consensus among most analysts is that the labor market is experiencing a downturn. The accompanying charts, prepared by Lawrence Werther and Brendan Stuart of Daiwa Capital Markets, clearly illustrate this trend. Unemployment is on an upward trajectory, while job growth is declining.
Jan Hatzius of Goldman Sachs highlighted the matter in a memo released today. “Though badly delayed, the September jobs report may have sealed a 25bp cut at the December 9-10 FOMC meeting,” he informed his clientele. “[Williams’] view is likely consistent with that of Chair Powell—who almost certainly wrote down three cuts in the September dot plot—and a majority of the 12 voting FOMC members, though not necessarily a majority of all 19 FOMC participants.”
Samuel Tombs and Oliver Allen, analysts at Pantheon Macroeconomics, expressed an even stronger conviction. This morning, they informed their clients that they believe Williams has secured a rate cut: “Mr. Williams’ words carry more weight than other FOMC members, as he has always voted with the majority and has never taken an opposing view to the Chair, either during his role as the NY Fed President since 2018 or when he was the President of the San Fran Fed between 2011 and 2018. We doubt Mr. Williams would have implied a December easing was likely without consulting members of the Board of Governors, including Chair Powell,”.
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures were up 0.25% this morning. The last session closed up 0.98%.
- STOXX Europe 600 was flat in early trading.
- The U.K.’s FTSE 100 was up 0.13% in early trading.
- Japan’s markets are closed today.
- China’s CSI 300 was down 0.12%.
- The South Korea KOSPI was down 0.19%.
- India’s NIFTY 50 is down 0.42%.
- Bitcoin was down at $85.8K.