Rate Cut Expectations Are Moving With More Volatility Ahead
We expect the market to remain volatile in the near term, but that may bring opportunity.
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Coming off Wednesday morning’s July JOLTS report, which showed far fewer job openings than expected, and the Beige Book report published a few hours later, the market has given back its earlier gains, but we’ve seen expectations for rate cuts wiggle around a bit.
The reason for that is that the JOLTS data showed far fewer than expected job openings and the Beige Book found “the number of Districts that reported flat or declining activity rose from five in the prior period to nine in the current period.”
While overall expectations for a 25-basis point cut at the Fed’s September meeting are still in the majority, its lead has slipped, while the probably for a 50-basis point cut increased to 43% from 38% as of Tuesday and last week. Probabilities attached to the Fed’s November meeting have also moved around with 75 basis points in rate cuts between the September and November policy meetings now in the lead at 49.5%. And while the overall market view still sees 100 basis points in cuts by the end of this year as the likely outcome (39.8% as of Wednesday), the probability for a 125-basis point cut is quickly catching it (35.2%).
However, when we look at the probabilities for a 50-basis point rate cut in September from a month ago, they were at 74%. Back then, the market expectation for 125 basis points in rate cuts this year was at roughly 50%.
What’s going on?
Roughly a month ago, GDP expectations slumped following the July Manufacturing data. Over the ensuing weeks, more economic data was published, including the much stronger-than-expected July Non-Manufacturing PMI report from ISM. Those figures led to GDP models ticking higher, with the Atlanta Fed’s rolling GDP forecast reaching a recent high of 2.9% in mid-August. Between Tuesday's data that showed manufacturing activity continuing to contract in August, and what we received today, that model now stands at 2.1% for the current quarter. However, as we discussed earlier, Thursday brings the August Service PMI reports from ISM and S&P Global as well as the August ADP Employment Change report. Friday, we get the August Employment Report.
What we’re getting at is that we will have a lot more information to chew through and it could very well re-jigger rate cut expectations yet again. That includes the data above that we’ll get over the next two days as well as next week’s August inflation data and then August reports for Retail Sales, Industrial Production and Housing Starts as the Fed conducts its September policy meeting. What the entire slate of data says about the economy, the employment market, wages and inflation will matter. While we recognize that, odds are the market will gyrate based on the data point it sees last.
That is one of the reasons why Helene Meisler and I agreed that the next few weeks are likely to be volatile in the market. Meisler and I also agreed that volatility brings opportunity, something we took advantage of in early August. It’s also why we shared our updated shopping list with you in our opening comments for Wednesday.
