A week out
Markets are now in their final few trading days ahead of a Fed blackout that will precede the Reserve’s decision next Wednesday. The US government shutdown, despite now feeling like a distant memory, continues to weigh on the Dollar and market pricing in general. In particular, as we approach the decision next week, all of a 25-basis point cut has been priced into the curve. Given the concerns around the lack of data in October and November as a result of the US government shutdown, that will surprise many observers. Many therefore question whether the Fed will be able to deliver what the market now expects given that it may lack the data to make a qualified decision.
In particular, those missing data points include CPI and the BLS’s labour market report, which will not be published until after the Fed’s meeting on December 10th. As you will recall, the Fed’s dual mandate to consider the price level as well as employment has been the driving force behind its decisions to cut rates this year. It hasn’t had a release of labour market data from a public institution since November 20th, and this data only observed employment as it was pre-government shutdown in September. There is a chance therefore that the market has gotten overzealous in its conviction behind a rate cut next week. In particular, when we consider recent commentary from Fed members, which will continue leading into the pre-meeting blackout, there is an argument that the market could be wrong footed.
So far, there has been limited adjustment to the Dollar’s value and spot pricing. As we approach next week’s decision, there is likely to be a bias towards selling the Dollar, providing that the expectation of a rate cut is not derailed by any remaining data items this week. That data includes releases of the Fed’s preferred measure of inflation, core PCE as well as the private ADP employment report. Yesterday’s ISM report recorded below consensus and therefore has supported the likelihood of a cut next week and continued to keep the Dollar offered.
Discussion and Analysis by Charles Porter
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