Equity futures were choppy but ultimately closed with marginal gains in the S&P, NASDAQ 100 and Dow Jones, although the Russell 2000 again finished in the red. Sectors closed predominantly with gains but Health Care, Communication and Tech saw mild losses, while Financials were flat. The highlights of the session were the S&P Global Flash PMI data for September which saw a poor release out of Europe while the US print was mixed with manufacturing missing, and services beating but with some attention on inflationary commentary within the report. The US data saw two-way price action in T-Notes but they ultimately settled flat ahead of supply this week, as well as a plethora of Fed speak on Thursday and US PCE on Friday. In FX, the Dollar saw marginal gains, primarily supported by the weaker Euro after the aforementioned PMI data while antipodes outperformed. Crude prices ultimately settled lower on disappointing PMI data despite ongoing geopolitical escalation between Lebanon and Israel. Over two speeches on Monday, Kashkari noted that the balance of risks have shifted towards risk of further labour market weakening and higher unemployment. He said a 50bps rate cut was the right decision and reflects progress on inflation and softening of the labour market. He also told CNBC that he would not have argued against 25bps, noting that both 25 or 50bps would have been reasonable, and he thinks that 50bps was a judgement call, with the Fed policy still in a net-tight position. Kashkari’s dot plot is in line with the median, seeing the policy rate at 4.4% at end-2024, and 3.4% at end-2025. When asked about neutral, he said there is a lot of uncertainty about where the Fed will cut to, but he is pencilling in a higher neutral rate than before the pandemic. He stressed it is still too soon to declare victory on inflation, but the disinflationary process appears to be on track. The Fed rate path will depend on the totality of incoming data. He acknowledged that policy remains tight, though it is uncertain on how tight it is, noting that signals on strength of the economy are confusing with GDP and consumer spending surprisingly resilient. However, there is little evidence that recessionary forces are building, or that inflation could surprise to the upside. Kashkari said he would love to get back to a 3.5% unemployment rate, noting how the labour market has not been driving inflation, and it is a lousy forecaster of inflation. Meanwhile Atlanta Fed President Bostic said that the economy is normalising more quickly than previously thought, so monetary policy needs to as well. Bostic supported the 50bps cut as a compromise between remaining uncertainty around inflation and risks to the job market. He also noted that the economy is effectively near conditions that would be considered normal, stressing a half point cut does not lock in a cadence for future rate cuts. On the mandate, Bostic said the Fed is now facing two “largely balanced” risks (vs Fed statement of “roughly in balance”). On the economy, he said that recent data shows him convincingly that the US is on a sustainable path to price stability, noting how price increases have narrowed and become concentrated in housing. He added the low recent levels of some recent inflation indicators portends well, noting how business leaders say pricing power has all but evaporated. On employment, he said the labour market is weakening, but it is not weak. Businesses are becoming more careful in hiring, but they are not considering layoffs. Bostic warned that risks to the labour market have increased, with the possibility of broad weakness higher than a year ago. On rates, he said the disagreement over the neutral rate is inconsequential when rates are this high. In the Q&A, Bostic added the recent dots show a “fair amount” of dispersion in opinion at the Fed, noting the range of views over the path forward and debate over neutral is robust. Bostic added that the Fed is not in a mad dash to neutral and he is in favour of not rushing to judgment or assuming the job is done on inflation. Bostic feels neutral is in the 3-3.25% range (above the median Fed dot plot of 2.9%). Bostic also stated that he previously had been concerned that rate cuts would unleash pent-up demand, but that may be substantially less than thought, note how levels of excess cash has diminished for many households, but some still have cash on hand and that could fuel demand. He expects choppiness on inflation going forward, and he will wait and see what is needed on rates, but if the labour market deteriorates, that is a reason for a faster pace to neutral, but that is not the baseline. Finally, the Fed’s Goolsbee stated that many additional rate cuts will likely be needed over the next year, stressing the need for rates to be lowered “significantly”. He was comfortable with the Fed’s 50bps rate cut, noting how it shows the Fed is focused on risks to employment, not just inflation. Goolsbee acknowledged that inflation is well down from its peaks and the labour market is at full employment, stating how the Fed cannot be behind the curve if the Fed is to reach a soft landing. He said that until the recent rate cut, falling inflation meant the Fed was tightening policy, and a 50bps rate cut made sense as the Fed shifts back to normal mode. On the neutral rate, he said rates are still hundreds of basis points above neutral, but if conditions continue like this, there are lots of cuts to come over the next 12 months. He noted how the Golden path is in the books and inflation came down without a recession last year, although a 0.7% increase in the unemployment rate is usually a warning sign of a recession, adding the rise in delinquencies is also a warning sign. The Chicago Fed President added that directionally, unemployment is increasing, but the level is still low. GDP growth, consumer spending and wage growth has been strong, but they are currently in a little bit of a cautionary period. Goolsbee is monitoring office building vacancy rates and making sure banks provision for any CRE losses. S&P Global Manufacturing Flash PMI for September unexpectedly fell to 47.0 from 47.9 (exp. 48.5), while Services declined less than forecast to 55.4 (exp. 55.2, prev. 55.7), which meant Composite marginally dipped to 54.4 from 54.6. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said, “The early survey indicators for September point to an economy that continues to grow at a solid pace, albeit with a weakened manufacturing sector and intensifying political uncertainty acting as substantial headwinds.” He further adds, the sustained robust expansion of output signalled by the PMI in September is consistent with a healthy annualised rate of GDP growth of 2.2% in Q3, but there are some warning lights flashing, notably in terms of the dependence on the service sector for growth, as manufacturing remained in decline, and the worrying drop in business confidence. Lastly, on prices, Williamson adds “Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector rising at the fastest rate for a year.” Elsewhere, Oil closed 0.80% lower while Gold was flat.
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