FOMC Headlines Busy Week
This week provides an interesting mix of economic and non-economic events to keep everyone entertained. Foremost will be the FOMC meeting on Wednesday with an updated economic and rate forecast. The Fed will keep the fed funds target range unchanged while the focus of the meeting will the rate forecast, especially for next year. After November’s strong jobs report, a lengthy pause in rate cuts seems to be in the cards, but the forecasts and Chairman’s press conference will be assessed for clues on how long the pause may last. Also, of note this week the December 15 tariff deadline is approaching so expect some announcement on that front. Does the strong jobs report embolden the president to hold firm on tariffs? The market expects the tariffs to be postponed, so if that’s not the case a Treasury rally should be the result. November CPI on Wednesday is expected to be another docile report and that will allow the Fed plenty of time to remain on the sidelines. In the meantime, retail sales for November are expected to build on the rebound in October, so, in sum, it could be another week of risk-on trading as we head towards year-end.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||1.89%|
|6 Mo LIBOR||1.89%|
|12 Mo LIBOR||1.92%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Dec 10||NFIB Small Biz Optimism||Nov||103.0||103.0||102.4|
|Dec 10||Nonfarm Productivity||3Q F||-0.1%||-0.1%||-0.3%|
|Dec 11||CPI YoY||Nov||2.0%||2.0%||1.8%|
|Dec 11||Core CPI YoY||Nov||2.3%||2.3%||2.3%|
|Dec 11||FOMC Rate Decision||Dec 11||1.50%-1.75%||1.50%-1.75%||1.50%-1.75%|
|Dec 12||PPI YoY||Nov||1.3%||1.1%||1.1%|
|Dec 13||Advance Retail Sales MoM||Nov||
|Dec 13||Retail Sales Control Group MoM||Nov||0.3%||0.3%||0.3%|
|Dec 13||Retail Sales Ex-Auto & Gas MoM||Nov||0.4%||0.1%||0.1%|
Top 5 Events for the Week
December 9-13, 2019
1. FOMC Rate Decision and Forecast Update – Wed.
2. Trade Developments – All Week
3. November Retail Sales – Friday
4. November Inflation Readings – Wed./Thurs.
5. UK General Election – Thursday
1. FOMC Rate Decision and Forecast Update — Wednesday
The last FOMC meeting of 2019 will conclude on Wednesday with no change to rates widely expected. The real drama will come in the updated economic and rate forecasts. The previous forecast in September had 2020 GDP at 2.0% and the median estimate for the fed funds rate for year-end 2020 at 1.875% (1.75%-2.00%). That essentially reflects one hike in 2020. Fed funds futures for year-end 2020 remain anchored around 1.3%, where it’s been since the last rate cut in October, and that reflects one rate cut in 2020. Given the strong jobs report from last Friday, we think the Fed sticks with its current rate forecast of one hike in 2020.
2. Trade Deal Update – All Week
Trade deal headlines change daily, if not hourly, but with the December 15 deadline approaching for additional tariffs we suspect we’ll get some major announcements this week. Whether a deal is agreed to or not the market is still expecting the tariff deadline to be extended. The one new wild card to that thinking is that the strong jobs report may embolden President Trump to stake out a hardline position and hold fast to the tariffs while the Chinese insist a tariff rollback is a mandatory concession. In any event, the calculus remains the same: if a deal is announced expect yields to push higher. For the benchmark 10yr Treasury it could push yields close to the 1.97% support that has held for the last month. If trade talks fall apart and the new tariffs are enacted expect yields to move towards 1.70% resistance.
3. November Retail Sales — Friday
The consumer was unfazed during the summer with all the trade and geopolitical handwringing; however, spending did soften in September with a noticeable dip in car buying. There was a bit of a bounce in October and another is expected for November. Expectations are for a 0.4% gain in overall sales versus 0.3% in October. Sales ex-autos & gas are expected to also increase 0.4% versus 0.1% the prior month. The Retail Sales Control Group (a direct GDP input) is expected to increase 0.3% matching the October increase. Thus, expectations are for a solid read on retail sales that builds on the tentative rebound in October.
4. November CPI Inflation Readings — Wednesday
Inflation as a driver of Fed policy has slipped in recent months as several Fed officials have expressed the view that the 2% benchmark should be thought of as a symmetrical target such that with a long period below 2%, allowing it to move above 2% for a period of time without hiking rates is becoming more accepted. Expectations for overall CPI are for an increase of 0.2% versus 0.4% in October. The core rate (ex-food and energy) is expected to also increase 0.2% matching the October increase. On a year-over-year basis, CPI is expected to increase from 1.8% to 2.0% while core CPI YoY is expected to remain unchanged at 2.3% for the second straight month and off the 2.4% high from August and September. With the Fed’s preferred cost gauge, core PCE, currently at 1.6%, it looks like docile inflation will allow the Fed to be patient with policy and remain in pause mode, probably well into 2020.
The UK is holding parliamentary elections on Thursday where current Prime Minister Boris Johnson’s Conservative Party is expected to win with a majority of the votes, although uncertainties always exist in matters of polling in recent years. That will likely seal a deal on Brexit with the timing of the divorce and the final divorce agreement remaining to be decided. The fact, however, that the populace is expected to vote with the Brexit-favoring Conservative Party, should give Parliament the necessary will and mandate to move a Brexit agreement through the House of Commons.
Thomas R. Fitzgerald
Director, Strategy & Research