Jerome Powell studying the calendar (AI image)
Federal Reserve pricing now suggests a 52% chance of a hike at the November 1 meeting, up from 40% earlier in the week. The jump comes after a surprisingly strong ISM services survey showed an acceleration in August, including in prices paid. The index rose to 54.5 from 52.5 while the pricing measure hit 58.9 from 56.8.
The market is grappling with how high Fed rates will go and how long they will stay there. Fed officials have clearly signalled that they will leave rates unchanged this month but will be watching the data to decide on what’s coming next. Some numbers have begun to moderate but the ISM services sector is a great forward-looking indicator and suggests there is still some strength.
One angle I’ve been contemplating — and have written about before — is a bit of a ‘boy who cried wolf scenario’. There was so much talk of a recession at the start of the year and companies hunkered down and perhaps consumers tightened up as well. Obviously it never came and now companies have tight inventories and are still seeing decent demand so they’re casting aside worries and investing and rebuilding inventories.
Much of a recession is psychological but that hurdle might have been overcome and the collective mindset has now moved beyond a recession; or at least the business mindset has.
Ultimately, higher rates hit consumers who can no longer afford cars and new mortgages but it could be a prolongued process. The market is pricing in 89 bps of cuts by December 2024 and that’s highly variable depending on how the data plays out. A ‘higher for longer’ scenario is certainly possible.
For now, the takeaway is US dollar strength.
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