The stock market should continue to be buoyed by strong corporate earnings reports this week. It also should be supported in the background by the Fed's intention to broaden its easier policy stance by ending its selling of long-dated securities. The September CPI will be released this week, despite the government shutdown. The consensus estimate, while a bit high, should not deter the Fed from cutting rates at the October 28-29 FOMC meeting.
The more immediate meeting with potential importance for the markets is this week's Fourth Plenum of the Chinese Communist Party. The question is whether rumors and circumstantial evidence of a power shift away from Xi Jinping to more pro-Western leadership, as reported in podcasts, bear out. This week's meeting of Treasury Secretary Bessent and the Chinese Vice Premier He Lifeng to attempt diffusing the trade fight may be suggestive of such an outcome.
The Fed appears to sticking with its easing plans, despite the absence of almost all hard data on the economy as a result of the government shutdown. It does have clues on the state of the economy. It sees private surveys, like the weak ADP Jobs Estimate and its own surveys, like the Beige Book.
The October Fed's Beige Book, which summarizes anecdotal evidence collected by the District Fed Banks, does not appear to make the Fed's decision easy. It suggested softer economic activity but higher inflation. However, the Fed has shifted its focus toward the risk of a soft economy, viewing the higher inflation as being boosted temporarily by tariffs.
The Book had a slightly soft tone regarding economic activity, thereby supporting easier policy. Four of the Districts reported a slight softening in activity, while three reported slight to modest growth. Five Districts reported no change. Regarding the labor market, most Districts reported lower headcounts, stemming from layoffs and attrition. Weaker demand, economic uncertainty and AI were blamed. The overall tone of the report sounded more like sluggish growth than recession. Nevertheless, labor costs have sped up, largely reflecting large increases in employer-sponsored health insurance premiums. And, tariffs contributed to a speedup in input costs. There was varied reports of the extent to which the higher tariffs were passed through to the consumer.
Consensus looks for +0.4% m/m Total CPI and +0.3% Core, to be released on Friday. These increases would be above the Fed's 2% inflation target, as their annualized increases are 4.9% and 3.7%, respectively. The y/y, which the Fed looks at, would be 3.1% for Total (versus 2.9% in August) and 3.1% for Core (the same as in August). The Fed views these 12-month changes as slightly on the high side. Despite being on the high side, consensus-like prints should not be a problem for the markets or Fed because tariffs will likely be blamed but viewed as temporary. Moreover, there is a possibility that Total and Core will print below consensus. For example, if Used Car Prices and Lodging Away From Home flatten out after their August jumps, Total risks being 0.3% and Core 0.2%.
Despite the mixed message from the Beige Book, public comments by Fed officials point to further rate cuts. For example, Fed Governor Miran wants a 50 BP rate cut but thinks a 25 BP cut is likely. Governor Waller wants a 25 BP cut at the October FOMC Meeting, but is unsure about subsequent moves (being dependent on the course of the economy). Fed Chair Powell kept the door open for more rate cuts in his latest speech.
Besides another rate cut, Powell indicated that the Fed is close to stopping its program of selling its bond holdings. This stoppage, a broadening of the easing policy, could be an important positive for the housing market since much of the Fed selling has been of mortgage-backed securities. The spread between mortgage rates and Treasury yields, which has been historically wide, should narrow with the ending of this program. Mortgage rates would fall by more than longer-term Treasury yields.
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