Signal & Noise Filter
Convergence
The prior issue of this series concluded with the out of consensus assertion that a December rate cut was still in play, despite Chair Powell’s attempts to downplay that expectation at the October FOMC presser.
“In Pinebrook’s view, Powell’s comments were an effort at strategic ambiguity meant to preserve policy optionality given buoyant financial markets in the face of a data embargo given the government shutdown, and an attempt at FOMC member management”.
Markets were disabused of Powell’s efforts on Friday November 21st when NY Fed head, John Williams, stated the opposite, that in fact a December cut was a policy preference by a majority of the Committee. Governor Waller and San Francisco Fed head Mary Daly have joined the chorus.
Thus, there has been a convergence in the views laid out on these pages and those of the Committee.
This is now the noise, as markets have gotten the memo and snapped three weeks of downwards and sideways choppy trading.
On the surface, the catalyst for an update of the Fed’s policy pivot was the September jobs data, which showed unemployment rising to 4.44%, a tick shy of the Fed’s 4.5% year-end U3 target.
This level however generates a .23 score on Claudia Sahm’s shiny toy model which is far and away from her .5 recession indicator.
Under the hood, tightening financial conditions in asset markets, namely credit spreads and volatility in the AI trade, showed signs of strain.
While there was talk of the “Trump put” struck at -5% from SPX all-time highs, it is really continued rent disinflation that creates the asymmetry to a lower inflation outlook and shifts the balance of risks to lower rates.
The long duration call still looks good.