A Powell Cut then what?

A third consecutive cut from the Federal Reserve is imminent this evening, but the market reaction will hinge on signals about what's coming next, especially Powell's press conference (more below). Due to the temporary time difference, the Fed decision is at 18:00 London, 19:00 central European time. All currencies are up against the US dollar, led by CHF and GBP, with the JPY the weakest. US advanced Q3 GDP grew 1.9%, beating the exp 1.6%, but still below Q2's 2.0%. US October ADP report on private sector jobs showed a 125K rise vs the exp 110K with the slowdown concentrated in manufacturing. USD ignored both reports. The Sept figure was revised down to 93K from 135K.  The Pre-Fed English Premium Video is found below.

Fed day is finally here and along with month-end it will surely unleash some pent-up volatility. The market is pricing a 94% chance of a cut and it would be the biggest monetary policy surprise in a decade if the FOMC were to defy that.

The intrigue lies beyond Wednesday. The market is currently pricing in a 27% chance of a cut in December. That was above the 40% midway through the month and near 50% at times in September but has trended lower as the US and China made headway on trade. At this point, a Phase One deal and an extended ceasefire are solidly priced into markets and that's probably what the Fed will assume going forward.

At the same time, the Fed is loathe to remove optionality and will preserve the option of easing further if trade or the economy deteriorates. The goal of post-meeting communication will likely be to keep December cut expectations around where they are now. In theory that should mean minor tweaks in communication.

The main risk Wednesday is a communication error. The most-recent Fed minutes indicated a growing push to communicate to markets this isn't a rate-cutting cycle. If Powell strikes the wrong tone in that signaling and dials back expectations too hard, that could spook equities. A similar message may also arise in the number of dissents or overly-optimistic economic commentary.

Can Equity Indices Rally Further?

Yes, sure. Powell could over-emphasize low inflation and economic risks; talking further about manufacturing and downside economic risks abroad. The market could take that as a signal about more cuts, which would weaken the dollar and breathe fresh life into gold. The best case scenario for stocks and worst one for JPY would be for Powell to send the message that further easing is precautionary, rathen than reactive to a serious erosion in growth.

Ultimately, Powell has gained some experience in his role and should have a relatively easy time of managing expectations.

With regards to today's Q3 GDP release, it's far too early to get an accurate read on Q3 and these numbers are routinely revised more than a full percentage point in either direction over the year ahead. The market is also jittery about a soft October jobs report because of the GM strike. The strike was not reflected in the ADP.