The Feds have been focusing on the labor

Today we get Conference Board consumer confidence. Many think it’s irrelevant because the public surveyed is hopelessly uninformed, but we guess political leaders and the Fed take it into consideration. We also get regional Fed reports from Dallas and Richmond, and house prices.

The Fed is going to cut rates tomorrow. What is said about it is more important than the act, since we have been expecting the cut for so long. The Feds have been focusing on the labor market near-term instead of inflation far off in the future, but in the absence of official government data and having been cut off from the special ADP report just for them, it’s not clear how they view that situation. See the chart from the Heisenberg report, and note that it starts at Jan 2024.

It’s a scary chart but remember all the things that are wrong about all the payrolls reports, not just ADP’s. The biggest is probably the gray/black labor market, which is vast, over 10 million. That means workers who are also consumers will keep consuming. Even the state-generated unemployment benefits reports don’t help because these workers are entirely outside the system.

If you are interested in evaluating the labor shortage, the Chamber of Commerce report, updated in July. Bottom line, we don’t see firms closing for lack of a workforce (new business applications are on the rise) and we do see wages going up. The labor shortage is real. It arises from the baby boomers retiring, the high cost of child care, and a dozen other factors both demographic and economic.

That doesn’t mean the Fed is “wrong” to emphasize jobs. But a 25 bp rate cut is not going to inspire firms to hire more workers. For that you need demand for the goods they make or services they provide. With interesting timing, Amazon announced 14,000 jobs cuts because of AI.

Just about everybody is pointing out that the important development will be not the rate cut, but rather the Fed ending quantitative tightening--maybe once and for all.

The NYT reports some markets have the willies about it. “The Fed started reducing its balance sheet more than three years ago as it unwound a pillar of its emergency response to the pandemic-induced financial panic. It had also bought securities during the 2019 episode as well as during the 2008 global financial crisis.

“At its most recent peak in 2022, the Fed’s balance sheet swelled to nearly $9 trillion. Now it is around $6.6 trillion. At the same time, the reserves that banks hold at the Fed have fallen to just above $3 trillion, from over $4 trillion.”

“The Fed last adjusted its balance sheet policy in May 2024, when officials said they would slow reductions. They said they would stop shrinking it when the amount of money in the banking system was ‘somewhat above the level’ that officials ‘judged to be consistent with ample reserves.’

“’Ample’ was not specifically defined, but many analysts and policymakers believe the Fed is approaching it. While Mr. Powell this month described the level of reserves in the financial system as ‘abundant,’ he also cited signs that liquidity in the financial system was ‘gradually tightening.’”

Reuters points out “An exit from QT also means the Treasury's financing requirements would decline because it no longer needs to borrow as much to cover the Fed's redemptions. Under QT, Treasury's borrowings effectively increase. The Fed shrinks its balance sheet by letting the bonds it holds mature. The Treasury redeems the debt and pays the U.S. central bank by subtracting the required amount from the cash balance it keeps on deposit at the Fed. In order to replace the cash it paid the Fed, the Treasury needs to sell new securities.”

Got that? We never approved of QE in the first place, partly because it was so… manipulative. Quantitative easing consisted of the Fed buying notes and bonds solely to lower the yield, increasing the amount of cash available to everybody else. (Why not cut rates some more instead?). When the Fed reduces its balance sheet, the amount of cash available to others goes down. This affects the overnight money market where banks and hedge funds borrow cash. The banks have surplus reserves, but the hedge funds may struggle to find the right amount at the right price.

Since when does the Fed and Treasury act for the benefit of hedge funds? Advice: do not explore YouTube or other media for opinions on ending QT. They mostly say, hysterically, the sky is falling. 

Forecast

We have risk-on in spades. Reuters notes “The MOVE index of implied Treasury volatility dropped on Monday to its lowest in almost four years, with the VIX equity market equivalent subsiding to its lowest in a month.” This accounts for the drop in gold, among other effects. Experts are pretty sure the Fed will end QT, or at least propose a roadmap for it, and that turbo-charges the rate cut universally expected tomorrow. So far there no chatter about how it may delay the Dec rate cut, although that seems obvious.

Some go so far as to wonder if we couldn’t get a return to QE. After all, the Fed misjudged the last time it tried for QT, and “inadvertently overshot its goal in September 2019, which forced it back into the business of adding money into the market.”

Not even the mighty Fed can predict how liquidity matters will play out. In other words, the wild risk-on mood has some tricksters waiting in the wings.

Then there is actual data due from the UK and eurozone, including GDP and CPI. The US stories dominate but do not rule. We also await rate decisions from the BoC, BoJ, ECB and next week, BoE. This is information overload, but the critical point is that the US-China “framework” trade deal is not the only factor in the world.

The consensus on the risk-on sentiment is for the dollar to suffer more losses. We want to see more downward momentum before we buy it in full.

Tidbit: Take a gander at the yuan chart in the chart package—a big opening gap yesterday. This is a managed exchange rate so not a reflection of market sentiment. Trump wants a lower dollar. China just gave it to him, a few days before the big meeting on Thursday. It’s a bribe, just like the gold “gifts” he grifts from tech bros and prime ministers.

Tidbit: While few are watching, a conflict is escalating between the US and Venezuela. The once useful tv show “60 Minutes” had a bit on expectations within Venezuela for election-stealer Maduro to be ousted from within, or maybe by the US, although Trump is allergic to US boots on the ground. An exploding cigar, maybe, shades of JFK/Cuba. Stay tuned. 

---

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!