Key Words: Friday’s jobs report ‘leaves Fed hostage to market,’ says Deutsche Bank’s Ruskin

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The Federal Reserve may have put itself in a tough spot, making it difficult for policy makers to disappoint Wall Street expectations for an interest-rate cut later this month, Deutsche Bank macro strategist Alan Ruskin says.

In a research note following Friday’s monthly U.S. jobs report showing the unemployment rate at a 50-year low, Ruskin acknowledges that the report offers sufficient support for those advocating for a rate cut on Oct. 30, as well as for those seeing this year’s two cuts as enough.

However, the Deustche Bank chief international strategist says failing to deliver on market expectations for another quarter percentage point cut in the U.S. policy rate at a 1.75%-2% range may be even more disruptive.

The Fed should instead attempt to tamp down rate-cut expectations for its December meeting rather than opting not to cut rates for a third time in as many meetings in late October, Ruskin argued in a note bearing the subject headline: ‘Alpha Alert – Payrolls leaves Fed hostage to market. More vol potential than it looks!’

In sum, plenty of scope for doves and hawks to argue their case. Fed speak (Powell up today) is going to be very important then in providing guidance, but strongest argument for an Oct cut is that to shift expectations against a cut will be very disruptive for markets. Instead, it is easier to bring down rate cut expectations for Dec 2019 and beyond.

So far, market expectations for the Fed to lower interest rates again on Oct. 30 is around 80%, down from around 90% a day go, but up from 49.2% a week, according to CME Group data based on federal-funds futures.

On Friday, the U.S. Labor Department reported the slowest pace of job growth in four months and survey reports from the Institute for Supply Management earlier this week suggested the manufacturing sector is contracting, reinforcing Wall Street’s expectations for another Fed rate cut The Dow Jones Industrial Average DJIA, +0.97%, the S&P 500 SPX, +1.00% and the Nasdaq COMP, +1.04%  indexes all rose on Friday as a result, with the bad news interpreted as ultimately good news for stocks, after the ugly start to October.

But for the week, the Dow is likely to close down 1.6%, the S&P 500 is on pace to end 0.8% lower, while the Nasdaq is on pace for a gain of 0.1%.

Powell on Friday afternoon, speaking at an event sponsored by the Fed in Washington, D.C., sounded upbeat about the economy, but noted its facing some risks and challenges. “Overall [the economy] is – as I like to say- in a good place.”