“they tried to rig the game, but you can’t fake influence”
- Kendrick Lamar JP
You post just one spite site and someone loses their job…Fire Franklin went viral and took down Big Game James!
That success quickly set me on establishing other sites, such as theeagleswillneverloseagain.com, pleasegivemeabilliondollars.com, and whyAnaDeArmasshouldhitmeup.com…don’t tell The Real Boss™ about that last one…also, I didn’t actually bother making websites for them so don’t try to click on them. Between the Eagles losses, PSU losses, Phillies gut punch…I can’t believe I still showed up for work!
If you’re wondering whether the FOMC will meet on 10/29 if the government is still shut down, the answer is yes. For all of Trump’s hatred of the Fed, it’s mostly funded via interest earned on security holdings. It doesn’t need Congressional appropriations to operate, so they will be open for business.
An astute observer might wonder how the Fed will make a decision in a data vacuum…
A snarky observer might reply that they’ve never seemed to need data before, but I’m not snarky. I would never suggest that they’ve ignored data before now, so what’s the big deal if they don’t have data today? Or that even with plenty of evidence that the labor market had slowed tremendously, just a few months ago 7 FOMC members said there would be no cuts this year. A snarky commentator might, but not me.
Snark is for the Birds.
Last Week This Morning
What to Talk About in the Absence of Data?
Sports.
jk
My journalistic integrity suggests I should talk about my teams just as much now as I do when they are winning, but since this is my newsletter, I get to do what I want. No more sports!
Instead - the divergence of SOFR expectations next year! Who’s excited?!
This year, pretty straightforward. A 99% probability of at least 1 cut, and a 91% probability of two cuts. Two cuts puts FF at 3.5%-3.75%.
Through Q1, still lots of consensus. A 70% probability FF < 3.5%.
But after that, there’s a 30% chance of FF below 3%...and a 30% chance there are no additional cuts.
This actually makes sense to me. The Fed has said it will be increasingly cautious with each additional cut as it approaches neutral. If the wheels aren’t falling off the labor market like the Penn State football season, why keep cutting?
I think it’s a safe bet that FF is at 3.5%-ish within 3-ish months, but the confidence drops off quickly after that. All else being equal, I’m setting cap strikes around 3.5%-3.75% right now and I am doing 24-36 months. The market won’t ding you for it being in the money, and you protect against some sort of V-shaped recovery. Even if rates level off, a Trump-friendly Chair might help push longer term cap prices down by taking rate hikes off the table.
This two-path probability reflects that the economy might keep chugging along…or the wheels could come off. It’s like an undefeated Eagles team after four games!
Look at how wide the divergence of opinions is for the people that decide these things.
Next year, FF could be 2.5% or it could be 4%. Again…these are the people that decide this!
Inflation will contribute to the Fed’s decision making. Inflation could take on increasing importance if it takes off or if the labor market hangs in there better than expected.
But jobs is the number one concern right now. That is especially true if the wheels come off.
What does this mean for Treasurys?
Not much. Treasury yields already price all this in. Expectation changes for +/- cuts will influence fixed rates.
SMBC’s excellent research team puts the T10 at 4% by year end, but back up to 4.25% at end of 2026. Who knows whether that comes to pass, but the rationale is:
Fed cuts to 3%-ish → the economy does ok → the typical FF/T10 spread is 125bps
Higher, but not 5% or 6%.
But countries are selling America! China is dumping Treasurys! Here’s a graph from Bloomberg’s Ira Jersey that shows foreign holdings of Treasurys is actually up since Tariff Day. If I’ve said it once I’ve said it a thousand times…the T10 is not like any other asset in the world. I can disagree with tariffs, and in particular the way they’ve been rolled out, but they aren’t the type of thing that causes countries to stop putting their money under the US mattress.
The Week Ahead
In the absence of data, Fed speeches will matter a lot. This will be the last week before the dark period for them to get thoughts in. I don’t expect much to change and a cut is still coming 10/29.
That means tariffs and China will be the market movers.
The eco data backlog is getting quite sizeable whenever it gets released…