U.S. equity futures and rates reverse gains this morning after disappointing manufacturing and services print from Germany and France. Equity futures had initially moved up overnight after reports that last week’s cancellation of the planned visit to U.S. farms was at the request of the U.S. The cancellation was initially believed to be in response to President Trump saying he wasn’t interested in “a partial deal”. Both countries described last week’s deputy-level trade talks as “constructive” – allaying immediate concerns over the U.S. – China trade talks. Investors await the planned high-level U.S.-China trade talks on October 10-11. The 10-year U.S. Treasury is currently trading at 1.69%, 3.6bps lower from last Friday’s close. While the U.S.-China trade talks are on top of investor’s minds, the disappointing data from Germany and France is a stark reminder to market participants of the vulnerability of the global economy.
Last week, Brent and WTI crude oil futures rose following an attack on a major crude processing facility in Saudi Arabia. The impact on the crude market appears to be currently contained as there continues to be a surplus in global supply. However, the risk premia in oil markets will likely increase out of concern of the potential for future attacks. The U.S., in response, will deploy military forces to Saudi Arabia. WTI and Brent currently trading at $57.735/bbl and $63.935/bbl, respectively.
As expected, the FOMC lowered the Fed Funds target rate to a range of 1.75% to 2.00% last Wednesday. The rationale behind the rate cut was additional insurance against headwinds facing the economy specifically around trade policy and softening global growth. Looking ahead, Chairman Powell and the FOMC board remain split and unclear as to the path of future monetary policy decisions – there were 3 dissents to last week’s 25bps rate cut. While the board remains split, there are several members that forecast another 25bps rate cut, which if occurs will likely come at the December 10-11 meeting. Interestingly, according to the “dot plot” (see graph below) or median Fed Funds target rate projections, most members don’t foresee additional rate cuts next year with many members projecting interest rate increases in 2021.
Key events this week:
- New York Fed President, John Williams, will host and speak at the U.S. Treasury Market Conference later today.
- San Francisco Fed President, Mary Daly, will deliver remarks in Salem, Oregon.
- On Friday, the Core PCE index (the Fed’s preferred inflation gauge) will be released and is forecasted to be 1.8% which would be the strongest reading since January.
