Fed Minutes Imply That Fed Is At Market’s Will

Neutral September Fed Minutes

September Fed Minutes weren’t that dovish. Especially considering the Fed cut rates at that meeting. And the Fed funds futures market is pricing in another cut in October. Despite the mixed signals given from the Minutes, stocks rallied. Fed expressed worries about the market getting ahead of itself. Ironically, the market got further ahead of itself on Wednesday. If the Fed doesn’t want the market to price in cuts, it needs to be more hawkish. This was a neutral statement.

Specifically, the Minutes stated, “a few participants” at the September Fed meeting said the Fed funds futures markets “were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate.” Furthermore, the Fed Minutes stated because of this misinterpretation, “it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers’ own expectations for that path.” Fed didn’t realign expectations in these Minutes.

Fed At The Will Of The Market

We could see a hawkish cut at the October meeting. A problem is the market might not believe the Fed since it will have just cut rates 3 times in a row (July, September, October). It’s tough for the Fed to present a united hawkish front because there is a lot of disagreement. 

At the September meeting, 7 Fed members voted for a cut, 2 voted for no change, and one voted for a double cut. In the dot plot, 5 Fed members supported no more cuts this year, 5 saw a rate hike coming, and 7 wanted another cut.

Fed can’t express a united hawkish or dovish front which makes it more responsive to the market. If the Fed can’t miniplate the futures market with guidance, it won’t surprise the market with its decision because that will create uncertainty. The trade war is creating more than enough uncertainty for businesses and traders. As you can see from the chart below, the global policy uncertainty index is the highest it has been this century.

Fed Fears Trade War & Likes The Labor Market

Stocks may have reacted positively to the Minutes because of the negative comments the Fed made on the global economy and trade. Fed mentioned the trade war 28 times. It’s a big reason it has cut rates twice this year already. 

The Minutes stated, expected risks “were tilted to the downside.” Furthermore, “important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed.”

Pessimism comes from weak investment spending (seen in Q2), weakness in manufacturing production (seen in August industrial production), and exports. Fed is also watching the yield curve. I’m not concerned with the inversion. Optimism comes from current conditions (possibly from the hard data), “robust” consumption, and the employment market. Low jobless claims and low unemployment rate don’t signal a recession. Worry is the decline in corporate profit margins will hurt hiring.

Another Good MBA Applications Report

In the week of October 4th, weekly MBA applications growth was 5.2% for the composite index after it grew 8.1% in the prior week. It grew because the refinance index exploded higher. Refinance index’s growth was 10% after it grew 14% in the previous week. In this report, it states rates fell 9 basis points to 3.9% for 30 year mortgages. 

FRED website, which updates on Thursdays, shows rates are lower. I’m expecting the average to drop in the next update. Keep in mind, this MBA data is a week old and the FRED data is updated to the current week. The all-important purchase applications index had a 1% weekly decline after it had 1% growth. 

Yearly growth was still 10% which shows how great housing is compared to last year. Also, yearly purchase and refinance comps will get easier in the next 2.5 months.

Weak August JOLTS

In July, hiring was strong, but openings fell, so many said it was a good report. This time, both fell which means it was a weak report. It’s not recessionary, but the absolute readings are going from great to good. Yearly growth is already weak. Specifically, job openings fell from 7.174 million to 7.051 million. That’s below estimates for 7.186 million and the low end of the estimate range which was 7.1 million. 

Yearly growth fell from -3.6% to -4% as you can see from the chart below. That’s the weakest growth rate since March 2017. In the last slowdown growth troughed at -5.9%. That was the weakest reading since the beginning of this expansion. This chart makes it look like a recession is on the horizon.

Hiring was very close to the cycle peak in July. In August, hiring fell from 5.978 million to 5.779 million. Yearly growth fell from 2.5% to -0.8% which was the weakest growth rate since June. This yearly growth isn’t nearly as bad as the last slowdown. Growth troughed at -3.3% in February 2017. 

Lowest growth of this expansion was -4.5% in March 2013. Quits rate fell from 2.4% to 2.3%. That’s not a huge decline, but it’s certainly a step in the wrong direction. On an absolute basis, quits fell from 3.668 million to 3.526 million. Yearly growth fell from 6.5% to 1.5%. That’s the lowest growth rate since January 2018.

Since hiring is the most important data point, let’s look at the details of this data line. Hiring in construction rose from 374,000 to 418,000 and hiring in manufacturing was down slightly from 338,000 to 329,000. Given the strength in job creation in healthcare, it’s surprising hiring in healthcare and social assistance fell 8.1%. It was the biggest monthly decline since August 2015. 

Hiring for professional and business services fell from 1.18 million to 1.097 million which was the weakest reading since January 2018. That’s weakness on an absolute basis rather than on a rate of change basis. The biggest decline in hiring was in the biggest region which is the South. Its hiring fell from 2.42 million to 2.275 million. 

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