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Citi Expects 50 Point Fed Cut in December

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Bloomberg Nov 4 09:05 · 14.7k Views

Citi Research US Economist Veronica Clark expects the Federal Reserve to cut interest rates by 50 basis points at the December meeting.

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  • 00:00 All right, Veronica, we have to start with this jobs report.
  • 00:02 We knew it was going to be messy because of the Hurricanes, because of the strikes.
  • 00:06 I think this is a lot messier than what some people thought.
  • 00:08 Yeah, I think it was.
  • 00:10 And, and trying to disaggregate those strike and hurricane effects, I think this was a weaker reading.
  • 00:15 Most importantly, I think I'm looking at that increase in the unemployment rate.
  • 00:18 So it on a rounded basis was unchanged,
  • 00:20 but it was very close to rounding to 4.2%.
  • 00:23 And that should be pretty clean of these strike and hurricane issues,
  • 00:26 kind of confirming to us that that drop that we saw in the unemployment rate in September, September is one off.
  • 00:31 Well, that's what I'm curious about too.
  • 00:32 I mean, if you listen to Julie Sue, that acting labor secretary, she's sort of taking a look at three month rolling averages and other things like that and saying, look, the labor market's still strong.
  • 00:41 The weakness though, that we saw in this report, I mean, let's set aside the 12,000 number, which we know is an anomaly,
  • 00:46 but there was a weakness in this report that we saw in previous reports as well.
  • 00:49 And I'm wondering if this is starting to compound to a level where we should start to be worried about the labor market.
  • 00:53 Yeah, No, I think we should
  • 00:56 got some pretty big downward revisions to payrolls the last couple months.
  • 00:58 Also
  • 00:59 private payroll employment in August now only rose by 37,000 jobs.
  • 01:03 That's pretty weak.
  • 01:05 I think we see this weakening labor market dynamic across a number of different data points, low hiring rate,
  • 01:11 low quit rates, you know, hours worked coming down.
  • 01:13 This does feel like labor demand that is, is pretty soft.
  • 01:16 And the number that we keep going back to is that unemployment rate which you pointed out.
  • 01:19 I mean, on the surface it looks unchanged, but if you go out 2 decimal points, a different story.
  • 01:24 Does that portend a more dramatic move in the unemployment rate in the months to come?
  • 01:27 Yeah, I think so, yeah.
  • 01:29 The the unrounded unemployment rate is the new unrounded core inflation essentially.
  • 01:33 But yeah, I do think this is kind of confirming that that drop in September doesn't necessarily repeat.
  • 01:38 And when you are in this dynamic of
  • 01:40 very weak hiring and and layoffs that are still low, yes.
  • 01:44 But when you have such weak hiring, you would be inclined to think, you know, people will just stay unemployed for longer.
  • 01:48 And there's that upward pressure on the unemployment rate still.
  • 01:51 So what does this mean for how the Fed proceeds?
  • 01:53 I mean, we're talking about 25 basis points pretty much baked in for November, but how does this shift the odds for December?
  • 01:59 Yeah, yeah, 25 basis points next week.
  • 02:01 But we do think this is a genuine weakening trend in the labor market.
  • 02:05 And maybe it's that November employment report, of course, that could confirm some of this weakness.
  • 02:09 I think people are kind of looking through this October data for now,
  • 02:12 but we'll get that November employment report before the December FOMC meeting.
  • 02:17 We think the Fed is cutting 50 then
  • 02:19 fifty.
  • 02:19 Really.
  • 02:20 Yes.
  • 02:20 Well,
  • 02:21 it gets this gets to the idea though, too, because a lot of people, I mean, I mean, I don't know if you've been watching this program and you watched it last week, you would believe the Fed was done.
  • 02:29 But I mean, this gets to the seesaw that the Fed is having to deal with looking at these data points and try to make sense of it.
  • 02:34 As we get into next week's meeting, which of course is just a couple of days after the election and then the December meeting.
  • 02:40 Do you think that the
  • 02:41 argument behind closed doors amongst the Fed members
  • 02:45 will be
  • 02:45 more tilted
  • 02:47 towards A50 basis point cut?
  • 02:48 I don't mean what Jay Powell wants, but I mean what the other members are willing to live with?
  • 02:52 Or do you think there's going to be a lot more talk about a pause, a prolonged pause?
  • 02:55 Yeah, I think the discussions at this meeting will probably be pretty neutral.
  • 02:59 We we did maybe have some stronger inflation data with September
  • 03:03 core inflation this week
  • 03:05 stronger at least in July and in August had been.
  • 03:08 But I think most Fed officials will see the increase in the unemployment rate and know that rates are very restrictive and be pretty worried about that increase.
  • 03:15 Yeah.
  • 03:16 When rates are as restrictive
  • 03:18 as they are, you want to pretty quickly get back to neutral in a weakening labor market.
  • 03:22 Yeah, that might be.
  • 03:23 Well,
  • 03:24 so it gets to this idea, though.
  • 03:25 I
  • 03:25 mean, do you know where neutral is?
  • 03:27 Because I mean, Jay Powell's gonna ask that.
  • 03:29 If he knows, he's certainly not telling us.
  • 03:30 And no one else seems to know.
  • 03:31 This seems to be the parlor game.
  • 03:32 We we don't know.
  • 03:34 But by the the highest estimate that, you know, Fed officials will place for that long on dot,
  • 03:39 we're still 100 basis points away from it.
  • 03:41 So it's easier to to go big when you're pretty far away from neutral at least.
  • 03:46 You know, I'm thinking about the market reaction to the jobs report and how bonds initially rallied.
  • 03:50 And then of course they reverse course.
  • 03:51 So far in 2024, David Rosenberg has said that the non farm payrolls has been revised down 80% of the time by cumulative
  • 03:59 337,000.
  • 04:00 Why does the bond market still trade off the initial print?
  • 04:03 Yeah, no, I mean, we are very sensitive to, to every single data point at this point.
  • 04:08 But yeah, those
  • 04:08 downward divisions have been pretty big.
  • 04:10 And that's even before factoring in.
  • 04:12 We did get preliminary estimates of the benchmark revisions a couple months ago
  • 04:16 that implies payrolls are overstated by about 70K right now.
  • 04:21 Yeah, we're just very sensitive to to every data point.
  • 04:23 I think right now too, we, we do have the election, of course, on Tuesday and that's,
  • 04:26 you know, preventing people from really reading too much into the data for now.