Global Daily – Will the Fed pivot back to patience?

by: Bill Diviney , Aline Schuiling

FOMC Preview: Fed won’t close the door to further cuts just yet – The Fed is widely expected to lower the target range for the fed funds rate by a further 25bp, when the October FOMC meeting concludes tomorrow. As we discussed last week, this is already priced in by financial markets, however an additional December cut looks much less certain. As a base case, we expect a further cut in December, but commentary from Fed officials – even doves – suggests an increasingly higher bar for more easing. Meanwhile, the September FOMC minutes showed “several participants suggested that the Committee’s postmeeting statement should provide more clarity about when the recalibration of the level of the policy rate in response to trade uncertainty would likely come to an end,” given the disconnect between how much easing is priced in by markets vis-à-vis the Committee’s own projections. The key line to watch here is whether the Committee will still “act as appropriate to sustain the expansion” or not. While some softening of this easing bias is possible, we doubt the Fed would switch entirely to a neutral stance as seen earlier in the year, when the statement indicated that “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” The dataflow has continued to weaken in the US, and while some kind of truce in the US-China trade war is possible next month, it is far from certain. As such, we think the Committee will be reluctant push back rate cut expectations too much, especially given that after tomorrow, there will be only a bit over one more cut priced in by markets over the next 12 months. (Bill Diviney)

Euro Macro: GDP to have stabilised in Q3 – Eurostat will publish the flash estimate of eurozone GDP growth in Q3 on Thursday. We expect GDP to have been stable during the third quarter after it grew by 0.2% qoq in Q2. In the first place, our forecast is based on the view that the recession in industry intensified in Q3. Industrial production fell by 0.6% qoq in Q2 and the 3mo3m growth rate stood at -1.3% in August, which suggests that the contraction was more pronounced in Q3 than in Q2. This view is underlined by further drops in business confidence in most eurozone countries as well as in the eurozone manufacturing PMIs in Q3. Meanwhile we think that the services sector expanded, albeit at a more moderate rate than the 0.6% qoq that was recorded in Q2. A slowdown in services growth was already pre-signalled by for instance the eurozone services sector PMI and the Ifo business climate indicator for Germany’s services sector.

On the expenditure side of the eurozone economy, the weakness in exports that started in early 2018 should have weighed on fixed investment growth. Growth in fixed investment excluding the extremely volatile investment in intellectual property (predominantly in Ireland and the Netherlands) slowed down from 1.3% qoq in Q1 to 0.7% in Q2 and we expect further moderation in Q3. In contrast, private consumption growth probably stabilised in Q3 (at roughly 0.3% qoq) as growth in retail sales slowed, whereas growth in new car registrations strengthened. Finally, the combination of net exports and the inventory building is expected to have had a roughly neutral impact on qoq growth. (Aline Schuiling)