All Signs Point to Falling Rates as Downturn Looms

We got three notable economic developments between Tuesday evening and Wednesday afternoon, with each signalling in different directions: the Federal Reserve's expanded balance sheet, the Labor Department's Job Openings and Labor Turnover survey, and the minutes from the Fed's September meeting. Yet, the ultimate result of these is clear: Interest rates are going to keep falling. Here's my take on the three developments. The Fed's Balance Sheet to Grow Fed Chair Jerome Powell announced Tuesday night that the Fed would be expanding its balance sheet by buying additional bonds, most likely somewhere on the order of $200 billion worth of Treasure Bills initially, although those details have not been hammered out. For most investors, this is a non-event. It tells us that the Fed has to be more of an activist to control interest rates, and that requires more firepower. I'm only even mentioning it here, because of how my Twitter feed lit up with people calling this quantitative easing. As I said just after the big repurchase agreement -- or repo -- spike a few weeks ago, the Fed used to intervene in money markets literally every day. Even in those days, it was constantly growing its balance sheet. I remember earlier in the 2000s showing a young analyst the stream of news stories on Bloomberg with headlines that included Fed adds overnight reserves, while the Fed was hiking rates. It was virtually every day. To fund such liquidity injections, the Fed participated in Treasury auctions, especially T-Bill auctions, routinely. The Fed has always had to maneuver to keep its balance sheet at the right level. This is nothing more than that. Jobs Survey Goes Unnoticed The Job Openings and Labor Turnover Survey (JOLTS), which was released on Wednesday, was another sign that the labor market is souring quickly. I'm not sure why it got so little attention from the market. The survey shows that job openings have declined 7.5% from their peak in November, with a more or less continuous downward trend since the first quarter. This fits very well with the story told by the Institute for Supply Management surveys earlier in the month, in which both manufacturing and services firms reported the lowest employment expectations in a decade. Macroeconomy data is always noisy. The best way to cut through the noise is to look for where all the puzzle pieces fit together. This is one of those instances. ISM says firms aren't expanding payrolls. They probably are still filling job openings that they already had outstanding, but new openings are mostly replacements. That fits with the JOLTS in decline. It also fits with Friday's non-farm payroll results, which showed mediocre gains, but gains none the less, as well as the lack of increasing initial jobless claims. This is a stage where firms are just nervous and thus slow-playing hiring. The layoffs come later. But I heard a lot of commentators suggesting that JOLTS shouldn't worry us precisely because the layoffs aren't happening. By the time the layoffs pick up, the recession will already be here. Prior to the 2001 recession, jobless claims didn't show a sustained increase until December 2000. Stocks had peaked nine months earlier. Prior to the 2008 recession, jobless claims moved slightly higher between October 2007 and March of 2008, before rapidly moving higher over the summer. Stocks peaked in October of 2007. I don't know how deep the slowdown will be or how long it will last, but it is now baked in that we're getting a slowdown. It is also now very clear that the labor market won't be immune. The Fed Is Still Divided The minutes of the Fed's September meeting depicted a divided Fed. It seems that there is a fairly large contingent of members who supported rate cuts to date, but want to signal that further cuts aren't a given. The hawk's case was given a full- and-separate paragraph within the Participant's Views segment, which is unusual. It suggests that there was a unified group of members with similar views and who made similar arguments -- namely that the outlook hasn't changed, the Fed is already accommodating, and they might be courting future risks by being overly accommodating now. It is likely this was the same group of several members who wanted to provide more clarity about when the recalibration of the level of policy rate... would likely come to an end. That was a big headline-grabber out of these minutes. But I still think the Fed is on course to cut in October and is highly likely to cut again in December. There are two major reasons. First, while this group of several are skittish about future cuts, the rest of the minutes suggest there is still a majority for risk-management based cuts. Second, as I suggested above, it looks to me like the labor market is deteriorating. If that happens, those skittish several will quickly change their tune. Bonds Offering a Good Entry If we get to a significant slowdown, odds are high the Fed cuts all the way to zero. If that happens, there is lots of room for longer-term rates to fall. I think the 2-year Treasury is very cheap at 1.45% and the 10-year is good value at 1.57%. I especially think that by ignoring this very bearish JOLTS report. the market is making a mistake.

All Signs Point to Falling Rates as Downturn Looms

Here's my take on the Federal Reserve's expanded balance sheet, the Labor Department's jobs survey, and Fed's September meeting minutes.

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