Pro Perspectives 10/3/19

October 3, 2019

On Tuesday the manufacturing data came in at 10-year lows.  Today the reading on the services sector came in at 3-year lows.

While the services sector is still expanding.  The manufacturing sector is in contraction. 

This is the impact of an indefinite trade war on confidence.  Weaker confidence, ultimately leads to weaker economic activity.

Until this year, the strategy from the Fed was to ignore it all.  They assumed they could keep plugging away at normalizing interest rates and shrinking their balance sheet, all while riding the wave of fiscal stimulus.   As long as the economic data was solid, their mistakes were hidden. 

But the markets called them out last December, and started pricing in a world where the central banks (led by the Fed) were asleep at the wheel during perhaps the most important step in the post-financial crisis global economic recovery: structural change (i.e. repairing global structural imbalances).  

So, as I said yesterday, finally the central banks have now positioned themselves to absorb potential shocks and economic weakness from an indefinite trade war. 

With that, let's take a look at the expectations that are building for another move by the Fed at their end of the month meeting (October 30th).

Just a week ago, the market was pricing in a coin flips chance of another quarter point cut from the Fed.  Following this week's ISM data, the probability of another rate cut has jumped to 88%.