Chances of Fed Rate Cut Rise on Weak U.S. Economic Data, Lack of Progress on Trade Talks

With less than two weeks to go before the U.S. Federal Reserve interest rate decision on October 30, every economic report will take on added importance especially with the manufacturing sector weakening, the labor market showing signs of softening and inflation still coming in below expectations.
James Hyerczyk
Fed Rate Cut

While most of the world was focused on Brexit and the progress of U.S.-China trade talks on Thursday, the U.S. released a number of economic data reports, ahead of speeches from a pair of Federal Open Market Committee members.

With less than two weeks to go before the U.S. Federal Reserve interest rate decision on October 30, every economic report will take on added importance especially with the manufacturing sector weakening, the labor market showing signs of softening and inflation still coming in below expectations.

Additionally, earlier in the week, U.S. retail sales came in lower than expected, which should be a concern because the consumer has kept the economy alive while the Fed waits for its two interest rate cuts to work through the pipeline.

As of Thursday’s close, the CME Fed Watch Tool estimates the chances of a Fed rate cut at the end of the month at 85.0%.

Dismal Economic Data

On Thursday, the Philadelphia Fed Manufacturing Index, Housing Starts, Industrial Production and Capacity Utilization, all came in below expectations.

A Federal Reserve survey showed Thursday that one in six companies in the Philadelphia region plans to reduce capital spending next year because of President Donald Trump’s trade policies.

The Philly Fed Manufacturing Index came in at 5.6, below the 7.3 forecast and 12.0 previous read. Additionally, 17.5% of respondents to the survey blamed their planned investment cuts next year on tariffs and other trade policies, 54.4% said they expect no change in spending and 14.1% said they’ll increase it as a result.

Another report showed U.S. homebuilding tumbled from a more than 12-year high in September. Housing starts declined 9.4% to a seasonally adjusted annual rate of 1.256 million units last month as construction in the volatile multi-family housing segment dropped, the Commerce Department said on Thursday.

U.S. factory output slumped 0.5% in September, as a strike at General Motors caused a steep decline in auto production amid broader struggles for manufacturers.

On Tuesday, the Federal Reserve said that manufacturing production has fallen 0.9% over the past 12 months, a reflection of the disruptions and uncertainties caused by the U.S.-China trade war.

Capacity utilization for the industrial sector decreased 0.4 percentage points in September to 77.5 percent, a rate that is 2.3 percentage points below its long run (1972-2018) average. Traders were looking for a reading of 77.7%.

Chances of Rate Cut Rise in Response to Data

The CME Fed Watch Tool rose to 85.0% after the release of the data, meaning the market believes the Fed will cut rates 25-basis points at the end of the month.

According to Steve Liesman at CNBC, “If there is no October rate cut, the Fed could instead cut again in December or pause again. What happens with trade could be critical to Fed decision-making. Even a partial deal between China and the U.S. could eliminate one of the most serious risks hanging over the U.S. economy. But the Fed will also need to consider the possibility of another failed round of talks that could lead to a more severe slowing.”

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