Stocks Spike After Powell Admits No Rate Hikes Unless “Significant Move Up In Inflation”

Stocks Spike After Powell Admits No Rate Hikes Unless “Significant Move Up In Inflation”

“Goldilocks” it is…

Fed Chair Powell suggested that rates are on hold, and further reinforced that by stating that rates won’t rise unless inflation takes off…

“I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.”

Equity algos loved that headline and spiked markets into the green…

And sent the dollar back down…

Source: Bloomberg


Tyler Durden

Wed, 10/30/2019 – 14:58

via ZeroHedge News https://ift.tt/2ovvOTH Tyler Durden

‘Evolved Russian Meddling’ Narrative Set To Taint 2020 Election As NYT Points To Africa Testbed

‘Evolved Russian Meddling’ Narrative Set To Taint 2020 Election As NYT Points To Africa Testbed

The specter of ‘Russian disinformation’ is set to feature prominently during next year’s election, leaving its diabolical red asterisk next to any populist victories Republicans may score in 2020. What’s more, this isn’t your typical ‘run of the mill, didn’t affect the outcome of the election’ meddling; According to the New York Times, Russia’s ‘manipulation techniques’ have evolved.

To review, a Russian ‘troll farm’ spent approximately $100,000 on Facebook ads (the majority of which were bought after the 2016 US election) and operated on other social media platforms with the goal of ‘sowing discord‘ via hyperbolic posts on immigration, black identity politics and Jesus arm wrestling Satan in the name of Donald Trump.

And while former Deputy (then acting) Attorney General Rod Rosenstein announced that Russian meddling over Facebook, Instagram and Twitter was not found to have altered the outcome of the 2016 election (and Putin somehow hacked Hillary’s campaign so she ignored key states), it appears that the red menace is back – and Russian manipulation techniques have ‘evolved’ after test-bedding an ‘enormous Facebook campaign in parts of Africa.’

The Radio Africa Facebook page, which masqueraded as a news page in Sudan, was part of a Russian-backed influence network in central and northern Africa. (via Stanford Internet Observatory)

Facebook said on Wednesday that it removed three Russian-backed influence networks on its site that were aimed at African countries including Mozambique, Cameroon, Sudan and Libya. The company said the online networks were linked to Yevgeny Prigozhin, the Russian oligarch who was indicted by the United States and accused of interfering in the 2016 presidential election.

Unlike past influence campaigns from Russia, the networks targeted several countries through Arabic-language posts, according to the Stanford Internet Observatory, which collaborated with Facebook to unravel the effort. Some of the posts promoted Russian policies, while others criticized French and American policies in Africa. Russians also worked with locals in the African countries to set up Facebook accounts that were disguised as authentic to avoid detection.

The effort was at times larger in volume than what the Russians deployed in the United States in 2016. While the Kremlin-backed Internet Research Agency posted on Facebook 2,442 times a month on average in 2016, one of the networks in northern and central Africa posted 8,900 times in October alone, according to the Stanford researchers. –NYT

Yes, according to former Facebook exec Alex Stamos, now-director of the Stanford Internet Observatory, Russia’s ‘Africa campaign’ has implications for the United States ahead of the 2020 presidential election.

He said it was highly likely that Russian groups were already using the same model of working with locals in the United States to post inflammatory messages on Facebook. By employing locals, he said, Russians did not need to set up fake accounts or create accounts that originated in Russia, making it easier to sidestep being noticed.

We will see a model where American groups are used as proxies, where all the content is published under their accounts and their pages,” Mr. Stamos said. –NYT

“They are trying to make it harder for us and civil society to try and detect their operations,” said Facebook’s head of cybersecurity policy, Nathaniel Gleicher.

This isn’t to say that Russia isn’t operating disinformation campaigns online – however one should take reports of ‘election meddling’ with a serious grain of salt given what we know about the impact of said operations.

Facebook faces a difficult adversary in Russia. The country had previously indicated that its disinformation techniques were changing and that it was aiming to work with locals on online influence campaigns.

In Ukraine, which held a presidential election this year, local authorities announced in March that they had arrested a Russian agent in the capital, Kiev. The agent, they said, had been ordered by his Russian handlers to “find people in Ukraine on Facebook who wanted to sell their accounts or temporarily rent them out.”

The latest campaign in central and northern Africa is the first well-documented case of Russia “franchising,” or outsourcing, its disinformation efforts to local parties, said Facebook and the Stanford researchers. It’s unusual for a nation to try to influence so many countries at once, they said. –NYT

In short, the red menace has wrapped its tentacles more firmly around the interwebs – infecting minds and influencing elections. Rest assured, any victories which pose a threat to the establishment will surely have Russian fingerprints all over them.


Tyler Durden

Wed, 10/30/2019 – 14:46

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“It Won’t Be Suffient”: Wall Street Reacts To Powell’s Final “Insurance Cut”

“It Won’t Be Suffient”: Wall Street Reacts To Powell’s Final “Insurance Cut”

The Fed’s widely anticipated, 3rd and final “insurance” rate cut is now in the history books, and with it comes the question is the Fed’s “mid-cycle adjustment” done, or is the easing only set to accelerate heading into 2020/2021 recession. The problem, of course, is that as a reminder, in the past 30 years, the Fed has never cut more than three times without the economy contracting thereafter.

So will “3 cuts and done” be enough? As Rabobank’s Philip Marey notes, “we still expect a US recession in 2020 that will force the Fed to cut rates all the way to zero before the end of next year.” And, as Bloomberg economist Andrew Husby notes, the market seems to agree: “as the 2-year yield reprices higher and the 10-year holds steady, flattening the curve, markets aren’t convinced the 75 bps of easing will be a sufficient mid-cycle adjustment.”

Below is a handful of kneejerk responses from Wall Street strategists laying out their views on today’s “hawkish cut” 

Jon Hill, interest rate strategist at BMO Capital Markets

  • “The Fed cut rates 25 bp and removed ‘act as appropriate’ from the policy statement. This isn’t to say that the Committee won’t cut if needed in December, but this is a clear signal that the bias is not as skewed toward additional easing as it has been in recent months”, said Hill summarizing the consensus “hawkish cut” take.
  • “The general characterization of the economy was nearly unchanged; look for Powell to exert a more patient bias as the lagged impact of the mid-cycle adjustment works its way through financial conditions and economic activity.”

Andrew Husby, economist at Bloomberg:

  • “In removing “will act as appropriate” the statement shows members are attempting to move away from an active stance, putting more emphasis on monitoring.”
  • However, as Husby notes, “as the 2-year yield reprices higher and the 10-year holds steady, flattening the curve, markets aren’t convinced the 75 bps of easing will be a sufficient mid-cycle adjustment.”

Win Thin, head of FX strategy at Brown Brothers Harriman:

  • The “subtle Shift” in the Fed’s language reduces December rate cut odds; the Federal Reserve’s omission of its pledge to “act as appropriate” reduces the odds that the central bank will cut again this year.
  • “I think the Fed is saying it will wait for new information before cutting again,” Win says in an emailed note. “I don’t see another cut in December unless the data really fall off a cliff.” That will be “dollar-positive.”

Ira Jersey, interest rate strategist at Bloomberg Intelligence:

  • “Although the Fed’s statement was basically in line with our expectations, the market appears to be taking the news a modestly less dovish than expectations. The same two dissenters should not be a surprise.”
  • “We don’t expect any major rate market response from this, but as has been typical of late, the press conference may be more market moving.”

Rishi Mishra, fixed income analyst at Futures First:

  • “The language describing the economy is a bit too upbeat…it should have changed” said Mishra.
  • They are trying to sell the idea of a resilient economy a bit too hard. I mean labor market remains strong, job gains have been solid…hardly! 2s10s flattened — I think that is because it’s hard to buy that assessment.”

Neil Duta, head of economist at Renaissance Macro:

  • “The only measure of longer-term inflation expectations that is “little changed” is the Survey of Professional Forecasters” said Dutta, noting that “surveys of consumers and households are definitely not little changed.”

Eliza Winger, Bloomberg Economics Associated:

  • “Bloomberg Economics expects Powell to leave the door open to additional easing in the press conference. The reality of slowing global and domestic growth prospects will compel the Fed to act again. We believe further easing is warranted.”

Source: Bloomberg

 


Tyler Durden

Wed, 10/30/2019 – 14:30

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Watch Live: Fed Chair Powell Explains Why The Biggest Liquidity Crisis Since Lehman Isn’t Stopping

Watch Live: Fed Chair Powell Explains Why The Biggest Liquidity Crisis Since Lehman Isn’t Stopping

So having got the ‘hawkish’ statement out the door, all that’s left is for Fed Chair Powell to get through the press conference without putting his foot in his mouth: admitting that this is a hawkish cut, and/or that the economy is considerably more fragile than investors think…

Oh and one more thing – how about the “transitory” liquidity crisis that continues at extreme levels of demand…

 

Fed Chair Powell is due to start speaking at 1430ET :

 

 


Tyler Durden

Wed, 10/30/2019 – 14:25

via ZeroHedge News https://ift.tt/2WBMoOB Tyler Durden

Bonds, Dollar, & Stocks Bid After Hawkish Fed Cut

Bonds, Dollar, & Stocks Bid After Hawkish Fed Cut

After an initial dump, equities are back at the day’s highs after The Fed’s cut-and-pause statement. Bond yields are down, the dollar is up, and gold is down…

Equity algos like it – for now…

The dollar is up, modestly…

Source: Bloomberg

The long-end of the curve is sliding lower in yield…

Source: Bloomberg

And gold is getting hit – though remains higher on the day…

Just what damage to all of this can Powell do?


Tyler Durden

Wed, 10/30/2019 – 14:20

via ZeroHedge News https://ift.tt/2PwKRaY Tyler Durden

Data-Dependent Fed Cuts Rates, Will “Assess” Path Going Forward

Data-Dependent Fed Cuts Rates, Will “Assess” Path Going Forward

While the assumption is that Fed officials (having passed on the opportunity to lean against market expectations) vote for a rate cut (96% odds and Fed has never surprised at that level), the big question is whether this will be the last rate cut for the foreseeable future.

*  *  *

Since The Fed cut rates in September, stocks have outperformed as the dollar, bonds, and gold have lost some ground…

The yield curve has steepened (back into un-inversion) since The Fed cut in September…

Source: Bloomberg

The “cut-and-pause” narrative is priced across the FF curve…

Source: Bloomberg

But, the stock market and Fed Funds market are disagreeing over how much easing is priced in…

Source: Bloomberg

While we had a stronger than expected GDP print today, US Macro has been notably disappointing since the September cut

Source: Bloomberg

Having said that, the size of bets on The Fed getting back to ‘zero’ have been rising…

Source: Bloomberg

One excuse The Fed had for cutting rates has faded as the odds of a trade deal have risen

Source: Bloomberg

And finally, before we get to what Powell actually did today, we note that the repo-calypse is very much not under control yet…

*  *  *

So What Did The Fed Do?

As expected, and priced in, The Fed cut rates 25bps and shifted the wording in the statement to a more hawkish stance

From:

“…will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

To:

“The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.”

Two dissents – Rosengren and George – who were both in favor of no cuts.

*  *  *

Full Redline Below:

 


Tyler Durden

Wed, 10/30/2019 – 14:05

via ZeroHedge News https://ift.tt/2qQocvN Tyler Durden

Chinese Patriotism: Huawei Smartphone Sales Jump 66% In China As Apple iPhone Sales Slump

Chinese Patriotism: Huawei Smartphone Sales Jump 66% In China As Apple iPhone Sales Slump

We’re starting to get first-hand knowledge of what we’re coining as the blowback period in the trade war. This is a point in time when Chinese consumers, downright furious of President Trump’s protectionist policies that targeted Chinese companies over the summer, have collectively stood up to an aggressor (the US), and have secretly fired back, targeting US firms by abandoning their products for domestic ones, all in the name of patriotism. 

Honestly, over time, the trade war, if solved next month or next year, or who knows at this point when it’ll be solved, will have devastating consequences for corporate America as their market share in China will erode as patriotism forces consumers to gravitate towards domestic brands. 

A new report from Canalys, an independent research firm focused on technology, has linked patriotism in China for the jump in Huawei smartphone sales in the third quarter.

Huawei’s 3Q19 smartphone sales soared by 66% YoY in China, compared with a 31% increase in 2Q19.

Between 2Q-3Q, President Trump escalated the trade war to near full-blown, and also attacked individual companies with economic sanctions and banned certain ones from doing business in the US. Chinese consumers responded by ditching American products, like Apple iPhones, as this is some of the first evidence we’ve seen of the blowback period, likely to worsen in 4Q19 through 1Q20.

As shown in the chart below, the July-September period of 2019 was a devastating quarter for Huawei’s top rivals, including Vivo, Oppo, Xiaomi (other Chinese brands), along with depressing sales from Apple. 

Smartphone shipments overall were 97.8 million, down 3% from 100.6 million for the same period last year.

Apple’s YoY slump gained momentum from -14% in 2Q to -28% for 3Q

Chinese patriotism allowed Huawei’s market share in the country to expand from 24.9% to 42.4% over the past year.

Canalys analyst Mo Jia said, “The U.S.-China trade war is also creating new opportunities,” adding that, “Huawei’s retail partners are rolling out advertisements to link Huawei with being the patriotic choice, to appeal to a growing demographic of Chinese consumers willing to take political factors into account when making a purchase decision.

The blowback period has begun, and corporate America should be terrified that their market share in China is about to evaporate. 

 


Tyler Durden

Wed, 10/30/2019 – 13:50

via ZeroHedge News https://ift.tt/2N0evDJ Tyler Durden

US Treasury Is Considering A 50-Year Bond For The First Time As It Warns Of Year-End Repo Fireworks

US Treasury Is Considering A 50-Year Bond For The First Time As It Warns Of Year-End Repo Fireworks

Today’s latest quarterly refunding announcement was closely watched for any commentary on how the Treasury may respond to the Fed’s recent “Not QE” announcement, which has the central bank buying up $60BN in Bills every month, which according to some strategists could cause a shortage of net Bill issuance, leading to fresh money market turmoil.

But before we get to that, here is a summary of the bigger picture: the Treasury reported that nominal coupon and floating-rate auction sizes will not change in the November-January quarter, as expected, at a record $84 billion for a fourth straight quarter. Per Bloomberg:

  • Government will sell $38 billion in three-year notes on Nov. 5, $27 billion of 10-year notes on Nov. 6, and $19 billion of 30-year bonds on Nov. 7
  • Planned sales, in line with guidance from July, will raise new cash of about $23.5 billion

This was in line with projections, as last year’s substantial increase in nominal coupon auction sizes in addition to higher bill issuance continues to provide sufficient funding to cover Treasury’s financing needs roughly until the end of FY2020, at which point auction sizes will need to again rise incrementally. TIPS auction sizes will also be held constant in the upcoming quarter after rising in previous quarters, in line with Treasury’s guidance. As with coupons, TIPS auction sizes will rise modestly in 2020 following the next refunding announcement.

The chart below shows how the TBAC expects the Fed’s purchases of Bills to affect the total private holdings of Bills under two scenarios: one in which there is no change in Coupon/Bill issuance, and one accommodates decreased Coupon issuance:

More importantly, the Treasury also announced it is still considering new debt products to meet future financing needs, including a 1-year SOFR-linked FRN as well as 20-year and 50-year nominal coupon bonds. The considerations are in the early stages, as Treasury is conducting analysis and outreach and will “provide market participants with ample notice” of any changes in future quarterly refunding statements. One notable observation from he report: foreign demand is not seen as a major driver of auction demand as the following chart confirms.

In light of the growing possibility that the Treasury will issue 1-year SOFR-linked FRNs, the TBAC provided the following pros/cons matrix of one-year issuance alternatives:

Back to the main point raised above, the TBAC press release stated that “based on current fiscal projections, and coupled with the Federal Reserve’s recently announced T-Bill purchases, it is possible that scarcity could develop in the T-Bill market if Treasury maintains its current coupon issuance sizes. Barring any change in issuance pattern, the Committee would expect to see a greater divergence in money market rates across T-Bills, CP, Fed Funds, SOFR and term repo rates.” Additionally, the TBAC cautioned that “year-end financing rates are expected to be volatile again owing to regulatory capital constraints primarily on the global systemically important banks (GSIBs).

In other words, another overnight G/C repo spike is all too possible in the last days of the year, just as BofA warned last Friday; and now, the TBAC is echoing that concern.

So what does the TBAC propose to alleviate this potential risk?

The Committee discussed at length the benefits and concerns of altering coupon issuance in light of recent Fed actions, including review of a scenario with 2- and 3-year issue sizes dramatically smaller to maintain the size of privately-held T-Bills. While smooth market functioning and adequate supply of T-Bills are vital, given current fiscal projections of increased borrowing needs in 2021 and 2022, and in keeping with Treasury’s regular and predictable issuance strategy to provide the lowest cost to the taxpayers over time, the Committee recommended keeping coupon issuance sizes unchanged for this quarter. Based on current fiscal projections, and in line with the August recommendations, the Committee expected little or no change to nominal issuance for much of FY 2020, but noted that FY 2021 could require further coupon increases. Finally, the Committee recommended continued close monitoring of developments in Treasury and Treasury funding markets, given expected changes in size and composition of the SOMA portfolio.

We discussed the Committee’s prior recommendation that between one quarter and one third of the financing gap be met with T-Bill issuance. While this quarter’s issuance will fall meaningfully below that target, (17%) the group expected Q2 FY2020 to be meaningfully above the target (39%). All agreed that the guidance was intended as a medium term goal to help increase the share of T-Bills outstanding over time, rather than a quarter-by-quarter directive. Given that T-Bills now represent 14.5% of debt outstanding and FRNs a further 2.5%, the Committee suggested future review on the appropriate share of variable rate debt taking into consideration projected interest expense, a potential SOFR FRN, and overall market functioning.

The Treasury indicated it’s still pursuing three prospective issues it’s been seeking feedback on this year. In Wednesday’s statement the department said it’s “taking a proactive approach to prepare for prospective future financing needs” by “exploring a range of possible new products.”

Those include a 1-year floating-rate note linked to SOFR, which is intended to replace the Libor benchmark; a rebooted 20-year bond; and a brand new, ultra long maturity 50-year bond. As a reminder, a SOFR-linked issue and a 20-year security topped the list of ideas the Treasury solicited from the Treasury Borrowing Advisory Committee early this year to help expand and diversify the investor base for its expanding pile of debt, but as several years ago, dealers were skeptical about the Treasury’s proposal for a 50- or 100-year bond when the department revisited the proposal earlier this year.

Separately, the Treasury’s latest quarterly estimates put 2019 total borrowing at $1.2 trillion, though it plans to issue less debt in the final months of the year than previously anticipated.

On Monday, the Treasury revealed that it expects to raise $352 billion in net marketable debt from October through December, $29 billion less than it estimated in July. The revision owed in part to a higher than expected cash balance at the start of the quarter, thanks to the Fed halting its balance sheet run-off sooner than expected.

Looking ahead, issuance is seen again picking up in January through March, to $389 billion, based on an end-of-March cash balance of $400 billion.


Tyler Durden

Wed, 10/30/2019 – 13:43

via ZeroHedge News https://ift.tt/331vFGL Tyler Durden

Iran’s Khamenei Blames US, Israel For Sowing “Unrest” Through Lebanon & Iraq Protests

Iran’s Khamenei Blames US, Israel For Sowing “Unrest” Through Lebanon & Iraq Protests

Clashes among various protest factions as well as with police have escalated in Beirut over the past days, amid nearly two weeks of mass anti-government demonstrations which have seen up to one million hit the streets, or up to 25% of the population, angry over widespread government corruption and as extreme lack of confidence in Lebanon’s currency and the central bank rises. The sheer size and intensity of the protests which has led to over 12 days of shuttered banks, schools, and public institutions amid gridlock and literal roadblocks, led to Saad al-Hariri on Tuesday resigning his post as prime minister, saying he had hit a “dead end” in trying to resolve the crisis. 

Western media reports have begun blaming Hezbollah for attacking anti-government protest camps in the Lebanese capital, after the group’s leader Hassan Nasrallah has grown critical of the mass movement, saying it’s being fueled by “foreign powers”. Others have blamed the violence, which involved stick-wielding men beating up protesters, on the rival Amal faction.

Regardless, Iran on Wednesday joined in the blame-game, with no less than Iran’s supreme leader, Ayatollah Ali Khamenei, weighing in with a series of statements slamming the ‘hidden hand’ of the United States and Israel for seeking the destabilize Lebanon and Iraq through protests which have gripped both countries. 

Khamenei went on a tirade in a series of tweets:“The biggest damage enemies can inflict on a country is to deprive them of security, as they are doing today in some countries in the region,” he wrote. “I recommend those who care in Iraq and Lebanon remedy the insecurity and turmoil created in their countries by the US, the Zionist regime, some western countries, and the money of some reactionary countries.” 

Likely the “reactionary countries” he has in mind include Saudi Arabia and its other gulf allies — long very active and with deep pockets in Lebanese politics. 

The top Iranian cleric’s words were at the same time echoed by President Hassan Rouhani’s office, who’s chief of staff, Mahmoud Vaezi, was quoted in Reuters as saying:“Our advice has always been to call for peace and (stopping) interference by foreign forces in these countries.”

The presidential spokesman added that Tel Aviv, Washington and Riyadh were “riding a wave of popular demands and providing those [foreign] forces with financial support.”

This as Iraq, which shares a border with Iran, has for the past month been hit with severely violent anti-government protests, resulting in a death toll now over 250, and thousands wounded. Iran-backed Iraqi Shia militias have reportedly been increasingly involved in assisting security forces in putting down the popular unrest which has swept the country – by some accounts even deploying snipers. This has increased fears that the even larger, but on the whole much more peaceful protests in Lebanon could also soon become armed and sectarian just in Iraq. 

Lebanese police stand between supporters of Hezbollah and anti-government protesters. Image source: AFP via Getty

Hezbollah, commonly viewed by western leaders as the “long arm of Iran” inside Lebanon, has formally come out against the protests this week, urging the crowds to disperse, as Voice of America describes

But in recent days, Hezbollah leader Hassan Nasrallah grew critical of the protests, claiming they have been backed and financed by foreign powers and rival political groups. He called on his supporters to leave the rallies, and urged the protesters on Friday to remove the roadblocks. The mass rallies have paralyzed a country already grappling with a severe fiscal crisis.

Hezbollah and its allies dominate the current government and is the country’s most powerful organization, building its credibility on its resistance to Israel’s years-long occupation of parts of Lebanon.

It appears the pro-Iran axis fears potential total political collapse and fracturing of the Lebanese state, which would be used of Hezbollah’s longtime enemies in the region to push the Shia organization out altogether. 

Considering the potential for such a ‘chaotic collapse’ scenario, regional war correspondent Elijah Magnier wrote the following of what the foreign elements would hope to gain

However, even though the protests have now taken on another dimension, the rightful demands of protesters will not be achieved by bringing down the entire political system. Lebanon needs legislative authority to modify laws and a government to execute and implement them. If the people appointed by the system fall, who would take over? The President? The protesters are asking for his resignation. The Army? Its high-ranking officers are appointed by the same politicians accused of corruption. It is not difficult to imagine a possible split inside the army, leading the country into total chaos.

This would be exactly the result desired by countries like Saudi Arabia and Israel, who would be happy to watch Lebanon sliding deeper into chaos. This would entangle Hezbollah, their fiercest enemy, in the internal situation of the country and would prevent Hezbollah from directing their efforts to stop Israeli ambitions in Lebanon.

And also considering that Lebanon’s citizens have long been wary of a return to the civil war period which marked the late 20th century, but more importantly that there’s still a devastating sectarian war in the final phases in neighboring Syria  which has at times spilled over briefly across Lebanese borders  a complete collapse of the Lebanese state in this context is extremely dangerous. 


Tyler Durden

Wed, 10/30/2019 – 13:20

via ZeroHedge News https://ift.tt/3213h6j Tyler Durden

Your Last Minute FOMC Preview: Here Is What The Fed Will Say Today

Your Last Minute FOMC Preview: Here Is What The Fed Will Say Today

As we said in our FOMC preview last night, the simplest summary of what to expect from the Fed in just one hour’s time is “If The Fed Doesn’t Cut, Brace For Impact; If The Fed Cuts… Then What?” A slightly more expanded take on today’s main event came from Curvature’s Scott Skyrm who cut to the chase:

Given the Fed is in easing mode and dumping liquidity into the market, it is unlikely they will NOT ease tomorrow. With over $200 billion in RP operations and $60 billion a month of QE Lite, it would throw the markets in turmoil if the Fed did not ease. For tomorrow, look for guidance about future rate cuts.

Below, courtesy of Saxo Bank’s Peter Garnry, is a somewhat more detailed preview of today’s Fed announcement, which notes that the market is pricing in a 95% probability of a rate cut “which means that the Fed will deliver this to the market.” But as the FX strategist notes, two main questions will drive price action tonight:

  • First, many questions will be raised on the current money market operations currently expanding the balance sheet. Initially these activities were communicated as temporary and insignificant but the programme has been extended and increased in size indicating something is not working as expected by the Fed.
  • Second, analysts will be scrutinizing any guidance on the FOMC meeting in December as clues to how the Fed views the situation. The market is currently pricing a 28% probability of another cut in December, so any guidance that indicates a higher probability will most likely lift equities in the short-term. Alternatively, as Jefferies warned earlier this week, should the Fed not cut rates today to leave itself December optionality, watch out for a “market tantrum.”

That said, cutting rates today may result in a potentially interesting – if not troubling – dynamic. While the initial rate cuts were widely seen as positive, conditioned on the market believing its an adjustment before growth resumes back to trend growth, however, “at one point if rates are cut further it signals an economic deterioration that is beyond the scope of the Fed to rectify before it turns into a vicious negative feedback loop.” In other words, another rate cut in December may suddenly go from being positive to negative for equity sentiment, although most of the equity decline would have happened leading into a December cut.

In other words, the prevailing consensus is for a September rate cut, with December “data dependent.” That’s why Goldman expects the FOMC to deliver “a third and final 25bp rate cut at the upcoming meeting” as strong signaling from Fed leadership indicates that the modest trade war de-escalation since September has not deterred them from completing a 75bp, 1990s-style “mid-cycle adjustment.”

That said, the committee is painfully fragmented, with rising divisions already visible in September, as 2 members voted against that cut and another 3 participants lodged a soft dissent via the dot plot. Most of the committee has subsequently self-identified their respective views of appropriate policy, and the chart below shows the most likely dot plot for 2019 labeled with Goldman’s working assumptions for its contributors.

And while the September dot plot showed only seven participants in favor of a third 25bp cut in the fourth quarter of 2019, this minority likely included the Chair and Vice-Chair. Reflecting this, and strong signaling from leadership that that outlook remains in place, the market (and Goldman) places 95% subjective odds of a 25bp cut today.

So barring a funds rate surprise – i.e. no cut, which would promptly send the market careening lower – Goldman also expects market participants to primarily focus on the policy outlook section of the statement and Powell’s subsequent  characterization of the conditions under which additional easing might be considered. As shown in the next chart, comments from Fed officials continue to indicate a diverse set of opinions about the appropriate policy stance, with many implying scope for additional cuts beyond October’s, but others professing skepticism about the easing already delivered.

And so, because even the leadership does not appear to view a fourth cut in December as the default outcome, economists now expect the Fed statement to drop the pledge “will act as appropriate,” a phrase that the market interprets as signaling a cut at the next meeting. At the same time, policymakers may want to convey some downward asymmetry in their funds rate outlook, in order to prevent a large FCI tightening after the meeting. Accordingly, the market will expect the “act as appropriate” sentence to be replaced with a reference to the easing actions already delivered (mirroring the language in October 2007 and June 2008) coupled with the following less committal guidance: “will act as needed to promote its objectives.”

Putting all of this together, Goldman expects the following changes to today’s statement:

  • Expect a downgrade to the consumption characterization (to “solid” from “strong,” in part reflecting soft September retail sales) but an unchanged characterization of overall growth (“moderate”) and job gains (“solid, on average”).
  • Expect an acknowledgement of the “further decline” in the unemployment rate.
  • Given mixed inflation data and continued focus on downside risks on that side of the mandate, Goldman does not expect changes to the inflation characterization. However, it does expect a tacit acknowledgement of softer intermeeting inflation expectations information (addending “little changed” with “on balance”).
  • Expect hawkish dissents from Presidents Esther George and Eric Rosengren. But despite rising divisions, no other voters are expected to join the dissenters.
  • Unlike in July, Goldman does not expect St. Louis Fed President James Bullard to dissent in favor of a 50bp cut, as his September dots were not consistent with a 1.4% funds rate.
  • Do not expect a reference in the statement to the intermeeting balance sheet actions, because they do not represent monetary policy actions and because no formal changes are required. However, Powell will once again address funding pressures and the Fed’s response in the press conference.

In summary, Powell will have a fine line to walk during the press conference if he hopes to satisfy market participants projecting additional easing as well as the critics of insurance cuts—both on and off the Committee. Reflecting this, we expect a slightly hawkish tone, hence a “hawkish cut”, with Powell alluding to a baseline of unchanged policy but emphasizing data-dependence and the ability to respond quickly if the outlook deteriorates.

Finally, this is what the FOMC statement redline will like, according to Goldman.


Tyler Durden

Wed, 10/30/2019 – 13:05

via ZeroHedge News https://ift.tt/2WsOOPl Tyler Durden