December Fed Rate Cut Likely

Fed Policy Outlook, Rate Cut Likely 

My, how two weeks can change expectations! Two weeks ago, the Federal Reserve (Fed) indicated that a rate cut would not be likely without the receipt of economic data, such as the Bureau of Labor Statistics’ (BLS) Non-Farm Payrolls (Jobs Report). That report isn’t expected until December 16, after the December 10 Fed meeting. Over the past two weeks, markets received other data that may be forcing the Fed’s hand. Current projections, as of Friday afternoon,show an 87% likelihood of a rate cut at next week’s meeting.   

PPI Report, Inflation Remains Tame 

Right before Thanksgiving, we received the Producer Price Index (PPI) report on wholesale inflation for September. Remember, most of the reports released were delayed due to the shutdown and show outdated data. It came in line with expectations, with headline inflation rising 0.3% in September while Core inflation (stripping out volatile food and energy prices) rose only 0.1%, less than expectations. The main reason headline inflation rose was due to gasoline prices increasing by 11.8%.  Anyone filling up the pump recently, however, can note that gas prices have now dropped under $3 for the first time in several years. Again, this is old data and isn’t a concern for inflation. 

Consumer Spending Weakens 

Core Retail Sales for September were a terrible number. This number directly impacts the GDP and serves as an indicator of the economy’s health. The market was expecting a rise of 0.3%, but it actually fell 0.1%. Consumers are not spending, which slows the overall economy. 

Rents Still Falling 

Apartment List released its November Rental Report. It showed that the 2.5-year decline in rents is continuing. Yearly rents are down 1.1%, even lower than October’s 1.0% decline. This is important because Owner’s Equivalent Rent is the largest component in both major inflation reports, the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). Continued declines in rents are good news for inflation and mortgage rates. 

ADP Employment Report Show Job Losses  

The November ADP employment report came out this week and showed a terrible number. It showed there were 32,000 job losses in the month when expectations were for 10,000-40,000 jobs to be created. A deeper dive reveals that small businesses, the backbone of the economy, shed 120,000 jobs in the month. Any further statements by Fed officials on the strength of the job market are laughable.  We will need to wait until December 16 to see if the BLS concurs with ADP or continues its pattern of significant revisions lower after releasing the data. 

Disinflation Continues 

With this poor employment data, the remaining Fed Hawks (who don’t want to cut rates) are still crying about inflation fears. Thankfully, we received the Fed’s favorite measure of inflation, the PCE. To reiterate, the data is from September,but headline inflation rose 0.3%, in line with estimates. Core PCE, excluding food and energy and the Fed’s primary focus, rose only 0.2% but showed a slowing in yearly inflation, going from 2.9% to 2.8%. The Fed’s goal is 2% Core PCE. 

Anything is possible, but given the poor jobs data, tame inflation, and almost 90% market expectations, it is highly likely we will see a rate cut at next week’s meeting. 

Looking Ahead: Next Week’s Important Dates 

Tuesday, December 9: Job Openings and Labor Turnovers (JOLTS), 10-year auction 

Wednesday, December 10: Fed meeting with Summary of Economic Projections (SEP) and Press Conference 

Thursday, December 11: Initial and Continuing Jobless Claims