FED: Gov Waller: 100-125bp Of Further Cuts Dependent On Continued Labor Weakness
Oct-16 13:49
Gov Waller's now-customary pre-FOMC meeting blackout speech laying out his monetary policy views is titled "Cutting Rates in the Face of Conflicting Data" (link).There's nothing really new versus what he's said in prior recent appearances, and indeed, he noted earlier today that not much has changed in the landscape since his last speech in late August.
- The punchline is that “I believe that the FOMC should reduce the policy rate another 25 basis points at our meeting that concludes October 29." That is a well-established, well-known view of his, and he's clearly a 3-cutter for 2025 (Sep, Oct, Dec) in the September Dot Plot. However he is a little more cautious going forward: "But beyond that point, I will be looking for how the solid GDP data reconcile with the softening labor market."
- He remains unconcerned with the impact of tariffs on inflation, eyeing labor market risks: "Tariffs have modest effects on inflation, but with underlying inflation close to our goal and expectations of future inflation well anchored, I believe we are on track toward the FOMC's 2 percent goal. As a result, my focus is on the labor market, where payroll gains have weakened this year and employment may well be shrinking already."
- With those in mind, he points to a further 100-125bp of rate cuts to get to neutral (implying a range of 2.75-3.00% or 3.00-3.25%), albeit in a data-dependent fashion: "What I would want to avoid is rekindling inflationary pressure by moving too quickly and squandering the significant progress we have made taming inflation. On the other hand, if the labor market continues to soften or even weaken and inflation remains in check, then I believe the FOMC should proceed to reduce the policy rate toward a neutral level, which I judge is about 100 to 125 basis points lower than it is today. The labor market has been sending some clear warnings lately, and we should be ready to act if those warnings are validated by what we learn in the coming weeks and months."
- He says he sees "a conflict right now between data showing solid growth in economic activity and data showing a softening labor market. So, something's gotta give—either economic growth softens to match a soft labor market, or the labor market rebounds to match stronger economic growth. Since we don't know which way the data will break on this conflict, we need to move with care when adjusting the policy rate to ensure we don't make a mistake that will be costly to correct. I believe that how that process plays out in the coming months will have a significant impact on the path of monetary policy." This is similar to comments he's made previously.
- As for the recent government data drought, "Although private-sector data alternatives are available and a helpful complement to official statistics, they are less informative when they stand alone. The delay in the September employment report in particular makes it harder to know whether the labor market is continuing to soften or is stabilizing." He's been looking at both private sector data and business contact anecdotes.
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GILTS: Off Lows, Following Tsys
Sep-16 13:48
UK paper has mostly looked to cues from Tsys over the past couple of hours.
- A downtick in global equity index benchmarks may also be providing some background support in recent trade.
- Futures last 91.32 after a recovery from lows of 91.22, ultimately sticking within the range established over the past couple of sessions. A bullish cycle remains in play. Initial resistance at 91.82. Initial support at 90.65.
- Yields 1.5-2.5bp higher, 5- to 10-Year zone under the most pressure.
- SONIA futures little changed to -3.0, SFIZ5 & Z6 have failed to retest lows seen in recent weeks/months.
- BoE-dated OIS continues to consolidate at hawkish cycle extremes, showing ~8bp of easing through year-end, with the next 25bp cut not fully discounted until the April ’26 meeting.
- CPI data headlines the local calendar tomorrow; our full preview of the release is available here.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA Rate (bp) |
Sep-25 | 3.976 | +0.9 |
Nov-25 | 3.935 | -3.2 |
Dec-25 | 3.890 | -7.7 |
Feb-26 | 3.787 | -18.0 |
Mar-26 | 3.752 | -21.5 |
Apr-26 | 3.681 | -28.6 |
EURIBOR OPTIONS: Outright Call Buyer
Sep-16 13:43
ERM6 98.3125c, bought for 4 in 10k total.
US DATA: Downward Revisions Take Gloss Off IP Beat
Sep-16 13:36
Industrial production and capacity utilization data pointed to a continuation of a tepid trend in August, with activity moderating since a push higher at the turn of the year.
- Industrial production was stronger than expected in August at 0.1% M/M (cons -0.1) but with a net downward revision of -0.16pps offsetting most of this positive surprise. The revision was concentrated in July with -0.4% M/M vs the originally reported -0.1%.
- Manufacturing production was on balance stronger than expected however, with a clear beat in August at 0.2% M/M (cons -0.2) after a net downward revision of -0.15pps also mainly in July.
- Utilities continue to play a volatile role, slipping -2.0% M/M in Aug for the heaviest decline since March after a net upward revision of 0.28pps.
- In trend terms, IP growth eased back four tenths to 0.9% Y/Y although sees slightly stronger recent momentum with 1.5% annualized on a 3m/3m basis. Manufacturing production also eased four tenths to 0.9% Y/Y with the same 0.9% annualized run rate.
- Capacity utilization meanwhile is pointing to a clearer recent moderation, at 77.4% for a second month running after a downward revision to its lowest since January. It peaked this year at 77.9% in Feb and was still at 77.8% in June.
