Investors are betting a weak September Institute for Supply Management manufacturing report, published Tuesday, will make it more likely the Federal Reserve will cut interest rates for the third straight policy meeting at the end of October.
Expectations for a rate cut by the end of October jumped to 60% after the ISM report from 40% a day ago, based on trading in the fed fund futures market.
The Fed’s overnight benchmark interest rate currently sits between 1.75% and 2%.
The 2-year Treasury not yield, sensitive to expectations for Fed policy, slumped 8 basis points to 1.542%, Tradeweb data shows.
But Fed officials are split on the road ahead for interest-rate policy.
At their meeting last month, seven top U.S. central bankers think another quarter-point cut would be appropriate by the end of the year.
Many others, including Chicago Fed President Charles Evans, thought it could be appropriate for the Fed to hold policy steady.
In a speech in Frankfurt earlier Tuesday, Evans said he thought the U.S. economy may grow by around 2.25% this year.
But the weak September ISM report is consistent with considerably slower GDP growth, economists said.
“The risk is this weakness spills over into the services sector, where the majority of hiring takes place,” said Brett Ryan, senior U.S. economist at Deutsche Bank.
Scott Brown, chief economist at Raymond James, said he went to a conference attended by business CEOs in Orlando recently and said it was “startling” to hear how much the trade war with China was impacting businesses.
“They can’t get pricing for next year, they can’t get supplies for next year. It makes it tough to run a business,” he said.
Ryan thinks the Fed will cut interest rates three more times, by a quarter-point in October, December and the first-quarter.
Brown had penciled in one more rate cut this year - in December - but said the weak ISM makes an October move more likely.
Beth Ann Bovino, chief economist at S&P Global Ratings, thinks the fractious Fed interest-rate committee may not ease in October.
“It’s going to be a heated discussion but at think point in time I think they are going to stay on the sidelines in October,” Bovino said.
Economists said that the pace of Fed action could ultimately depend on the U.S. September employment report, set for release on Friday. Economists surveyed by MarketWatch expect the economy created 147,000 jobs in the month.
“If we get deterioration in the labor market, the Fed will come in a lot quicker,” Brown said.
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