/Analysis | The Finance 202: Will the Fed hold steady, or keep cutting interest rates? Trump highlights Powells pinch.
Will the Fed hold steady, or keep cutting interest rates? Trump highlights Powells pinch.

Analysis | The Finance 202: Will the Fed hold steady, or keep cutting interest rates? Trump highlights Powells pinch.


Analysis | The Finance 202: Will the Fed

hold steady, or keep cutting interest rates?

Trump highlights Powells pinch.

THE TICKER

President Trump, amid angrily tweeting about the House Democratic impeachment inquiry, unintentionally summarized the conundrum facing Federal Reserve Chair Jerome Powell. 

In three tweets, Trump piled on political pressure to keep cutting interest rates further — even as he touted the strength of the U.S. economy, accurately noting the S&P 500 is flirting with record highs and the housing market looks resilient (though he also claimed slipping consumer confidence is “very good”).

The Fed is highly likely to follow suit today. Bond traders are pricing in a 97.3 percent probability the central bank trims its benchmark interest rate by another quarter-point, according to the CME’s FedWatch Tool, and the consensus among Fed-watching economists reflects that view.

What happens next is a much trickier question for Powell. As he seeks to plot a course beyond this week’s meeting, he must weigh signs of economic resilience against the possibility conditions deteriorate.

“Wall Street investors do not expect another reduction this year, and views are split on what the central bank will do in 2020,” my colleague Heather Long writes. “Powell has tried to keep the Fed out of the political fray, and he and his colleagues are aware that stimulating the economy next year — or not — could influence the election.”

As Heather writes, Fed officials have gotten an earful on their nationwide “Fed Listens” tour from workers urging more rate cuts. And other economic signals are flashing warning signs: Manufacturing is contracting; job gains have slowed; economists are lowering their projections for GDP growth and raising concerns about a recession next year.

Yet there are also reasons for optimism. A pause in U.S.-China trade hostilities may be at hand. And beyond the measures of economic health Trump cited, the bond market suggests a pause is in order. “Two-year yields, at 1.64%, are up almost 30 basis points from earlier this month, while 10-year yields have climbed more than 40 basis points from their lows,” Bloomberg News’s Brian Chappata notes. “The yield curve between those two maturities is the most positively sloped since before the Fed’s first rate cut in July — a far cry from August’s ‘doom and gloom.’ ”

The pressure will be on Powell today as he faces reporters — with investors on Wall Street and beyond hanging on his every word — to preserve maximum maneuverability when he is asked to detail the Fed’s path forward. “Mr. Powell’s task will be to craft a message that neither presumes a cut is likely in December nor declares an outright end to rate cuts — without provoking a market backlash that unwinds the benefits from moves to reduce borrowing costs for households and businesses,” the Wall Street Journal’s Nick Timiraos writes. Or, as Morgan Stanley chief U.S. economist Ellen Zentner tells him, “The challenge is threading a needle where the eye has become extremely tiny.”

Pantheon Macroeconomics chief economist Ian Shepherdson writes in a note to clients his firm expects Powell “to make it clear that a presumption that the data will trigger more rate cuts is dangerous… We think any attempt by Chair Powell today to persuade his colleagues to signal an intention to keep cutting rates would be met with real resistance, and we doubt that Mr. Powell feels the need to pick that fight at this point.”

MARKET MOVERS

S&P 500 hits record, then falls back. CNBC’s Fred Imbert: “The S&P 500 touched a fresh record high on Tuesday before closing just below the flatline as investors looked ahead to key Federal Reserve meeting. The broad index closed 0.1% lower at 3,036.89, snapping a four-day winning streak. Earlier in the session, however, it gained as much as 0.3% to hit an all-time high of 3,047.87… Tuesday’s moves come a day after the S&P 500 posted its first record high since July 26, breaking above 3,027.98. Better-than-expected earnings, along with improvements on the U.S.-China trade front, pushed the broad index above its previous record set in July.”

U.K. aims for Brexit clarity with December election. The Post’s Karla Adam and William Booth: “Prime Minister Boris Johnson on Tuesday finally won lawmakers’ support for an early election, setting up a Dec. 12 ballot that will be dominated by Brexit, Brexit and more Brexit.Parliament will dissolve next week, and the parties will go into overdrive on their five-week campaigns… Voters will be offered some stark choices on Brexit, alongside the usual overenthusiastic promises, scary scenarios, misrepresentations and foggy numbers. Will the British double down on wanting to leave the European Union? Or will they change their minds and decide to stay in the largest trading club on the planet?”

Mnuchin open to looser bank rules. Bloomberg’s Saleha Mohsin: “Treasury Secretary Steven Mnuchin is open to loosening financial crisis-era regulations that have stiffened liquidity rules for big banks to relieve possible cash crunches in short-term funding markets. Mnuchin said in an interview Tuesday that he had spoken to Jamie Dimon, chief executive of JPMorgan Chase & Co., and other banks about how to avoid liquidity problems. ‘The banks have raised an issue around intra-day liquidity, and that is something that makes sense for regulators to look at,’ Mnuchin said in Tel Aviv, his first stop during an 11-day trip through the Middle East and India.”

TRUMP TRACKER

TRADE FLY-AROUND:

The U.S.-China might not be ready soon after all: “An interim trade agreement between the United States and China might not be completed in time for signing in Chile next month as expected but that does not mean the accord is falling apart, a U.S. administration official said,” Reuters’s Steve Holland reports.

“ ‘If it’s not signed in Chile, that doesn’t mean that it falls apart. It just means that it’s not ready,’ the administration official said. ‘Our goal is to sign it in Chile. But sometimes texts aren’t ready. But good progress is being made and we expect to sign the agreement in Chile.’ ”

  • Ag purchases are a sticking point. Reuters’s Heather Timmons and Hallie Gu: “Trump has said publicly that China could buy as much as $50 billion of U.S. farm products, more than double the annual amount it did the year before the trade war started. U.S. officials continue to push for that in talks, while Beijing is balking at committing to a large figure and a specific time frame. Chinese buyers would like the discretion to buy based on market conditions.”

— Tariff Man’s efforts to save steel backfired: “When [Trump] slapped 25% tariffs on foreign steel in March 2018, panicky U.S. buyers rushed to place new orders ahead of feared supply interruptions, driving prices up sharply,” the Los Angeles Times’s Don Lee reports.

“It was an instant bonanza for domestic steel producers. With much fanfare, some announced ambitious expansion plans. United States Steel Corp. even fired up a pair of long-idled blast furnaces in Granite City, Ill., and Trump seized the occasion to deliver a rousing speech at the plant about the industry’s resurgence. What a difference a year has made. Benchmark steel prices have fallen well below their level before the tariffs took effect and are now about half their peak in July 2018. The industry has responded with production cutbacks.”

  • What happened: “Emboldened by tariffs, the president’s pro-business rhetoric and tax cuts that poured money into corporate coffers, steel companies went on a spending spree that added production capacity to a domestic market that didn’t need it. Historically low interest rates added to the steel industry’s enthusiasm for investing in new and improved plants and equipment.”
  • And other tariffs didn’t help: “At the same time, Trump’s penchant for on-again, off-again trade warfare contributed to a general slowdown of the global economy. U.S. manufacturing, which along with the construction sector is the principal consumer of American steel, is currently in recession.”

The picture of Midwest manufacturing isn’t any rosier: “The sudden slump at this 110-year-old company illustrates the economic erosion that is challenging [Trump’s] signature promise to restore a lost era of American manufacturing greatness,” my colleague David J. Lynch reports of the Wisconsin Aluminum Foundry.

“Even as the $21 trillion U.S. economy continues growing, and unemployment hovers at a half-century low, factory activity has contracted for two consecutive months, according to the closely watched Institute for Supply Management index. Many consumer-goods makers are still humming. But manufacturers that serve global markets are being buffeted by trade wars and profound uncertainty over the future.”

The White House wants control over where cars are made: “The Trump administration wants to dictate how and where global auto companies make cars and parts to secure duty-free treatment under the new NAFTA — in its most direct intervention yet to manage trade and production, according to people familiar with the effort,” Bloomberg News’s Jenny Leonard reports.

“The issue is being discussed between Trump administration officials, congressional staff, and domestic and foreign auto makers in the context of the legislation that lawmakers will vote on for the trade deal to take effect. The White House wants specific language that would allow it to unilaterally administer the production rules for companies … But the companies, lawmakers and even the U.S. International Trade Commission in an economic analysis have cautioned that the rules are so strict that they would result in higher car prices and lost sales.”

Labor secretary approved to participate in Fiduciary rule discussion: “Labor Secretary Eugene Scalia can participate in the department’s rewrite of a closely watched investment-advice rule, career government ethics attorneys said,” the Wall Street Journal’s Eric Morath reports.

“Mr. Scalia, a former Washington lawyer, assumed the cabinet position a month ago and whether he could participate in the Labor Department’s rulemaking on financial advice was an open question. He had previously handled a legal challenge to the Obama administration’s version of the regulation, known as the fiduciary rule.”

POCKET CHANGE

Murray Energy files for bankruptcy: “Murray Energy Corp., the private coal giant whose founder pushed the Trump administration for an overhaul of what it called ‘anti-coal’ environmental policy, filed for Chapter 11 protection,” my colleagues Taylor Telford and Dino Grandoni report.

“It’s the fifth coal company to land in bankruptcy court this year, in a rapidly shrinking industry that’s being squeezed out of the U.S. power market by cheaper options such as natural gas, solar and wind power. The long-anticipated bankruptcy is another sign that [Trump’s] efforts to save the sputtering coal industry, a central promise of his 2016 campaign, have largely failed.”

Juul names new CFO: “Juul CEO K.C. Crosthwaite has replaced the company’s chief financial officer amid a management shake-up at the embattled e-cigarette maker, according to people familiar with the matter,” CNBC’s Angelica LaVito reports.

“Several top executives have left the company, including Chief Administrative Officer Ashley Gould and Chief Financial Officer Tim Danaher, two veteran employees at the young start-up. Newcomers Craig Brommers, chief marketing officer, and David Foster, senior vice president of advanced technologies, are also gone.”

Strikes cost GM nearly $3 billion: “General Motors Co. lowered its full-year profit outlook, saying the 40-day strike at its U.S. factories wiped out nearly all its free cash flow for the year and will cost the Detroit auto maker close to $3 billion in lost earnings,” the WSJ’s Mike Colias reports.

“The move came even as the car company posted third-quarter results that easily surpassed analysts’ forecasts. GM shares rose 4.3% … a sign that investors are looking past the strike to the potential for strong earnings in 2020 underpinned by a refreshed line of pickup trucks, the company’s biggest moneymakers. The share-price gains made up nearly all the ground the stock had lost since the strike began in mid-September.”

  • Meanwhile, GM sides with Trump in California fight: “Breaking with some of their biggest rivals, General Motors, Fiat Chrysler and Toyota said … they were intervening on the side of the Trump administration in an escalating battle with California over fuel economy standards for automobiles,” the New York Times’s Hiroko Tabuchi reports. “Their decision pits them against leading competitors, including Honda and Ford, who this year reached a deal to follow California’s stricter rules. It represents the latest twist in one of the Trump administration’s most consequential rollbacks of regulations designed to fight climate change.”

Fiat, Peugeot in possible merger talks: “Fiat Chrysler Automobiles and Peugeot maker PSA Group of France are in talks over a potential combination, according to people familiar with the matter. A deal could create a nearly $50 billion trans-Atlantic auto giant,” the WSJ’s Ben Dummett, Nick Kostov and Christina Rogers report.

NCAA makes major shift: “Amid rising pressure from lawmakers to permit college athletes to profit from their fame, the NCAA announced it would consider rules changes that would allow college athletes ‘the opportunity to benefit from the use of their name, image and likeness in a manner consistent with the collegiate model,’ ” my colleague Will Hobson reports.

“The statement and an accompanying NCAA ‘questions and answers’ explanation represented the organization’s first acknowledgment of a willingness to discuss permitting individual athletes to trade on their fame. However, it contained few specifics on how doing so could be reconciled with ‘the collegiate model’ that prohibits such benefits and likely won’t quell the organization’s critics or pacify elected officials pushing for change.”

Saudi Aramaco IPO set to begin next week: “Saudi Aramco aims to announce the start of its initial public offering (IPO) on Nov. 3, three people with direct knowledge of the matter told Reuters, after delaying the deal earlier this month to give advisers time to secure cornerstone investors,” Reuters’s Hadeel Al Sayegh, Davide Barbuscia and Saeed Azhar report.

Futures exchanges cut down on runaway algorithms: “The Chicago Mercantile Exchange is cracking down on runaway algorithms in one of the world’s biggest futures market,” the WSJ’s Alexander Osipovich reports.

“Over the past two months, the volume of data generated by activity in CME’s Eurodollar futures soared 10-fold, according to exchange statistics. The torrent of data strained trading systems and prompted complaints to the exchange, traders said. It subsided Monday after CME took emergency measures to halt it … The data surge, which hasn’t been previously reported, wasn’t caused by an actual increase in trading. Instead, it mainly consisted of digital messages that showed changes to quotes to buy or sell Eurodollar futures, a contract that tracks short-term U.S. interest rates.”

Subprime lenders are back with a new type of credit: “It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates,” Bloomberg News’s Christopher Maloney and Adam Tempkin report.

“If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession … In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion.”

MONEY ON THE HILL

Boeing CEO gets grilled: “Boeing chief executive Dennis Muilenburg came under intense grilling at the Senate Commerce Committee …his first public questioning by Congress since Lion Air flight 610 crashed into the Java Sea exactly one year ago,” my colleagues Ian Duncan, Michael Laris and Lori Aratani report.

“Muilenburg told senators he was open to reassessing how much responsibility his company takes on for guaranteeing that its new planes are safe as he testified about two deadly crashes involving the 737 Max. But he would not pledge his company’s support for stricter laws.”

Payday lenders’ plan to get access to Trump: “Billing himself as one of President Trump’s top fundraisers, Michael Hodges told fellow payday lenders recently that industry contributions to the president’s reelection campaign could be leveraged to gain access to the Trump administration,” my colleague Renae Merle reports.

Sen. Elizabeth Warren (D-Mass.) responds:

Ex-Im Bank extension in peril. The Hill’s Sylvan Lane: “A House bill to reauthorize and impose stricter standards on the Export-Import Bank appears to be doomed in the Senate, threatening a shutdown at the controversial agency as lawmakers near a deadline to fund the government. The Democratic and Republican leaders of the House Financial Services Committee were unable to strike a deal over a bill to fund and reform the Ex-Im Bank ahead of a Tuesday markup of the measure, said Rep. Patrick McHenry (R-N.C.), the panel’s ranking member…

“Senate Majority Leader Mitch McConnell (R-Ky.) is unlikely to take up any bill passed by the Democratic-controlled House without substantial GOP support, but House Republicans are unlikely to defeat the bill in the lower chamber, which could force the Senate to produce a viable bipartisan alternative.”

CHART TOPPER

Benn Steil, director of international economics for the Council on Foreign Relations, argues that if China goes ahead with $20 billion in purchases of American farm products as reported, U.S. farmers will be $7 billion worse off than if Trump had never launched the trade war in the first place:

DAYBOOK

Today:

  • The Financial Services Committee continues its markup of an extension for the Export-Import Bank.
  • Apple, Facebook, AK Steel, Lyft, Sony, Starbucks, Yum! Brands, McKesson, General Electric, MetLife and MGM Resorts are among the notable companies reporting their earnings.
  • CFTC Chairman Heath Tarbert keynotes the annual Futures & Options Expo. in Chicago

Thursday:

  • Fiat Chrysler, Re/Max Holdings, Bristol-Myers, Clorox, Cigna, DuPont, Altria, Royal Dutch Shell, Sirius XM and Sanofi are among the notable companies reporting their earnings.

Friday:

THE FUNNIES

BULL SESSION

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