What to expect when expecting
What to expect when expecting — The Federal Open Market Committee (FOMC) delivered a not-so-well telegraphed 50 basis point (bps) rate cut nearly two weeks ago. By now the market has fully digested it. Uncertainty persists, however, over how the Federal Reserve intends to alter rates in the future. And it’s not just market participants who are unsure about what the Fed will do next.
At the September FOMC meeting, Michelle Bowman favored a smaller rate cut; in doing so, she became the first Fed governor to dissent against a policy decision favored by the Fed chair since 2005. “In my view,” said Bowman to the Kentucky Bankers Association last week, “beginning the rate-cutting cycle with a quarter percentage point move would have better reinforced the strength in economic conditions, while also confidently recognizing progress toward our goals.” Her peers, meanwhile, seem more focused on the maximum employment part of the Fed’s dual mandate. In his post-rate cut press conference, Chair Jerome Powell emphasized that the 50-bps cut was designed to preserve the strength of the labor market.
As for financial markets, they are currently pricing in 40 bps of rate cuts at the November 7 FOMC meeting. By November 2025, the terminal rate is projected to bottom in the 2.75% to 3.00% range.
Cuts of 250 bps over 14 months (5.50% upper range to 3.00%) would not be unprecedented. In fact, cuts of that magnitude would be light when compared to the past eight easing cycles, where the median cumulative cut was 450 bps (Figure 1). Past easing cycles also tended to begin with very aggressive cutting measures, mild cuts in the middle, and then more aggressive final cuts (Figure 2).
The length of the past eight monetary easing cycles has also varied considerably. On one extreme, as Figure 3 shows, the easing cycle that began in June 1989 lasted nearly 40 months; on the other extreme, the easing cycle that began in July 1995 lasted just over five months.
Whether the Fed can engineer a soft landing this time around will determine the magnitude and duration of the current easing cycle. It now seems clear that the labor market will take over as the Fed’s leading economic indicator, after taking a backseat to inflation the last couple of years. While the Bureau of Labor Statistics’ monthly employment report will be released this Friday, another important—yet often overlooked—indicator was released last week: the Conference Board’s Consumer Confidence Index (CCI). The CCI slumped by 6.9 points to 98.7, the third-lowest print over the past two years.
The weakness in consumer sentiment reflects a dimming view of the job market. The spread between the “jobs plentiful” and “jobs hard to get” questions on the CCI survey has now declined for eight consecutive months—the longest such streak since 2008, when the gauge declined for 11 consecutive months (Figure 4).
FROM THE DESK
Agency CMBS — Heavy Fannie Mae and Freddie Mac volumes weighed on the agency market again last week. Approximately $1.8 billion of DUS TBA volume has come to market each of the last two weeks, a significant bump from the $935 million year-to-date (YTD) weekly average. Week-over-week (WoW), DUS spreads were up to five bps wider as investors struggled to absorb the supply heading into quarter’s end. On the other hand, Ginnie Mae supply remained low and spreads tightened two to three bps, WoW.
Municipals — AAA tax-exempt yields were flat throughout the yield curve, WoW. The market continued to see a heavy primary new-issuance calendar. Even with the elevated issuance, however, spreads have remained relatively constant in recent weeks. Municipal bond funds had a 13th straight week of inflows last week, at $592 million ($14 billion of inflows YTD). The high-yield fund subset also continued to have inflows, with $349 million arriving last week (23rd straight week of inflows). With the November elections fast approaching and the Fed expected to continue cutting rates, we may see a slowdown of fund inflows in the fourth quarter.
Economic Calendar for the Week Ahead
| Indicator | Release | Period | Consensus | Prior |
|---|---|---|---|---|
| S&P Global US Manufacturing PMI | 10/1/24 | Sep. | 47.0 | 47.0 |
| ISM Manufacturing | 10/1/24 | Sep. | 47.6 | 47.2 |
| ISM Prices Paid | 10/1/24 | Sep. | 43.5 | 54.0 |
| ISM Employment | 10/1/24 | Sep. | — | 46.0 |
| JOLTS Job Openings | 10/1/24 | Aug. | 7,660k | 7,673k |
| ADP Employment Change | 10/2/24 | Sep. | 125k | 99k |
| Initial Jobless Claims | 10/3/24 | Sep. 28 | 221k | 218k |
| Continuing Claims | 10/3/24 | Sep. 21 | 1,830k | 1,834k |
| S&P Global US Services PMI | 10/3/24 | Sep. | 55.4 | 55.4 |
| S&P Global US Composite PMI | 10/3/24 | Sep. | – | 54.4 |
| ISM Services | 10/3/24 | Sep. | 51.6 | 51.5 |
| Factory Orders, MoM | 10/3/24 | Aug. | 0.1% | 5.0% |
| Durable Goods Orders | 10/3/24 | Aug. | 0.0% | 0.0% |
| Change in Nonfarm Payrolls | 10/4/24 | Sep. | 146k | 142k |
| Unemployment Rate | 10/4/24 | Sep. | 4.2% | 4.2% |
| Average Hourly Earnings, YoY | 10/4/24 | Sep. | 3.8% | 3.8% |
Summary of Global Fixed-Income Markets
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