Pro Perspectives 10/7/19

October 7, 2019

We enter what could be a very important week for markets. 

China trade negotiations resume this week.  And we have a slew of Fed officials scheduled to speak, including a prepared speech tomorrow by Jerome Powell.

Trump made sure he did his part today to remind the Fed they should be lower, given subdued inflation and the ultra-easy stance of its global central bank counterparts. With the softer manufacturing data last week, the interest rate market is already pricing in a 73% chance of another rate cut from the Fed at the October 30th meeting.  Trump is looking for a "substantial cut."  That said, whether he gets any Fed action this month, or not, will depend on the developments on the trade standstill (more in a moment).   

What should be closely watched this week, from the Fed commentary, is any discussion about the balance sheet.  It was arguably the Fed's error in shrinking the balance sheet, especially in concert with the ECB's exit of QE, that sent global financial markets haywire (namely, the spiral of global interest rates deeply, and broadly, into negative yield territory).  And, as we know, the ECB is now back in the QE business, with plans to restart QE in November.  And as few know, the Fed has quietly been expanding its balance sheet again.  

Here's the latest look at the Fed's balance sheet.   

With the atonement from global central banks, we may find global bond yields begin to recover.  

On that note, we have a good bullish technical reversal signal today in the U.S. 10 year yield.

Now, as I said, the Fed's actions this month will depend on the developments on trade.  With central banks now providing tail winds for the global economy and markets, we've talked about the prospects that Trump may (should) agree to a cut-down version on a U.S./China deal just to get it done — to remove the overhang of uncertainty on the global economy.  Remember, there were White House "sources" saying as much early last month — that a "limited deal" was in the works.