S&P 500 futures are up 0.25% this morning as investors, having digested grim data from the U.S. labour market last week, feel that a 0.25% cut in interest rates from The Fed is locked in. The talk now is whether U.S. Federal Reserve chairman Jerome Powell will surprise the markets with a “jumbo” 0.5% cut, or opt instead for a series of 0.25% cuts month by month.
The consensus is that the Fed will deliver only a 0.25% cut. But a minority of speculators—just under 10%—in the CME Fed Funds futures market think 0.5% might happen.
“The broader market psychology has shifted. Following Fed Chair Powell’s pivot at Jackson Hole, the question is no longer if the Fed will ease, but how fast,” Convera’s George Vessey said in a note this morning.
Pantheon Macroeconomics forecast three cuts of 0.25% this year; Wedbush’s Seth Basham forecast two.
With expectations of a new round of cheaper money coming down the pipe, global markets were all up this morning.
In the private sector, average job growth was only 29,000 per month June to August, according to a note from Daiwa Capital Markets, down from an average of 100,000 per month in Q1—before the tariffs took hold:
Daiwa’s Lawrence Werther and Brendan Stuart point to another gloomy indicator: The private-sector payroll diffusion index—which surveys 258 private-sector industries—found that more companies are cutting jobs than hiring new workers. The gauge fell to 48 in August—anything below 50 indicates negative hiring.
The Fed will be under pressure to support the full employment side of its dual mandate. There’s a fly in Powell’s ointment, however. We’re going to get a new numbers for the producer price index (PPI) and the consumer price index (CPI) this week, and the expectation is that they’ll show inflation continuing to go up. The other half of the Fed mandate is to fight inflation—and that’s why some economists are still saying that a 25% cut isn’t as guaranteed as the equity markets are assuming.
Here’s a snapshot of the markets globally this morning:
