Bulls and bears on Connecticut’s Gold Coast

Oct 10, 2024

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QUICK FIX

GREENWICH, Connecticut — Most investors still believe that the Federal Reserve will cut interest rates by a quarter of a percentage point at its meeting next month. But the Fed’s case for lowering rates by another 50 basis points by year end — which was what central bank policymakers had projected at their September meeting — is starting to look shakier.

The September jobs report put to rest any immediate concerns about the labor market running out of gas. The collective hyperventilation over the Sahm Rule — which suggests the economy is facing a recession when the three-month average jobless rate increases by half a percentage point from its lowest level over the course of a year — feels like ancient history.

“Two weeks ago, we were talking about the Sahm Rule,” Pablo Calderini, the president and CIO and Graham Capital Management, told a roomful of investors at the Delamar hotel on Wednesday during the annual Greenwich Economic Forum. “Now we’re talking about inflation.”

The Consumer Price Index — out later this morning — is expected to show that prices climbed at an annual rate of 2.3 percent in September. The “core” CPI, which excludes food and energy, is expected to be around 3.2 percent.

Dallas Fed President Lorie Logan said the Fed should proceed with rate cuts “gradually,” arguing that looser financial conditions and stronger-than-expected consumer spending could still cause inflation to climb. The minutes from the central bank’s September meeting, released yesterday afternoon, suggested that Fed Chair Jerome Powell had to sell certain policymakers on the need for last month’s hefty half-point cut, Victoria Guida reports. (Michelle Bowman was the first Fed governor to cast a dissenting vote in almost two decades).

The economy’s underlying strength and the Fed’s latest messaging have started to resonate with investors. Michael de Pass, the global head of rates trading at Citadel Securities, told Bloomberg that he only sees rates falling by another quarter point between now and the end of the year. The likelihood that Powell will hold rates at the current range of 4.75 to 5.00 percent at the next meeting doubled between Tuesday and Wednesday, climbing to 21.2 percent around market close, according to CME’s FedWatch tool.

Of course, there is a ton of economic data that will be released between tomorrow’s CPI report and the Fed’s Nov. 6-7 meeting that will weigh on the central bank’s decision — including the October report on the jobs market.

Despite September’s blowout jobs number, employment in the manufacturing sector has been contracting for months. Anne Walsh, the CIO of Guggenheim Partners Investment Management, told the GEF crowd that while the overall economy has been resilient, there have been “rolling” recessions through interest rate-sensitive sectors like manufacturing and commercial real estate.

Still, expectations that the Fed will move aggressively to lower borrowing costs have now faded.

“I think they can cut rates a bit, but they can’t cut rates a lot,” Bridgewater Associates Founder Ray Dalio, speaking virtually from Singapore, told the audience at the GEF.

IT’S THURSDAY — If you’ve got tips, let me know at ssutton@politico.com.

Driving the Day

The Consumer Price Index for September will be released at 8:30 a.m. … Fed Governor Lisa Cook speaks at the Women for Women Summit in Charleston at 9:15 a.m. … Richmond Fed President Thomas Barkin will speak at a fireside chat at the Virginia Maritime Association 2024 International Trade Symposium at 10:30 a.m. … New York Fed President John Williams will speak at Binghamton University at 11 a.m. … Donald Trump will speak at the Detroit Economic Club at 1 p.m. … The SEC holds a closed meeting at 2 p.m. … Vice President Kamala Harris speaks at a Univision Town Hall at 10 p.m.

Whoa — Scott Bessent, the founder of the hedge fund Key Square and one of Trump’s top economic advisers, said Trump could nominate a “shadow” Fed chair to make Powell a lame duck more than a year before his term expires. “You could do the earliest Fed nomination and create a shadow Fed chair,” Bessent told Barron’s Matt Peterson. “And based on the concept of forward guidance, no one is really going to care what Jerome Powell has to say anymore.”

The dangers of Milton — Hurricane Milton was projected to be the most severe storm to hit the Florida peninsula in decades. CNBC has cited estimates from Jefferies that peg the potential losses as high as $175 billion, with $70 billion in losses around Ft. Myers alone. “This is the worst-case scenario,” former state Sen. Jeff Brandes, who is now the president of the research institute Florida Policy Project,told Gary Fineout.

— About 6 million people live in the evacuation zone, according to Bloomberg. Elected officials are working to combat misinformation as they urge residents to leave the area, POLITICO’s Irie Sentner and Andrew Howard report.

— ICYMI: Eleanor Mueller: “Milton threatens to trigger flood insurance reckoning for Congress”

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The Economy

More chatter from the Greenwich Economic Forum — There were rain clouds over the Delamar hotel when “Dr. Doom” himself, Professor Nouriel Roubini, told the GEF crowd that a second Trump term could usher in an era of stagflation. By mid-afternoon, the sun was shining and top investors were feeling a bit brighter about the prospects for both the U.S. economy and markets.

— “I'm actually very optimistic about where we're going,” said Chris Hyzy, the chief investment officer at Bank of America Merrill Lynch. The U.S. government is still providing stimulus in the form of deficit spending. The Chinese government is considering additional stimulus to shore up its flagging economy and the world’s largest central banks are cutting rates, he said. “Where do you think growth is going to go?”

— Anastasia Amoroso, the managing director and chief investment strategist at iCapital, said she believes the S&P 500 could climb above 6,300 by October of next year. The index closed at a record high of 5,792 on Wednesday.

— But, but, but: Ballooning U.S. debt could drive up the cost of capital in the coming years. Few of those at the GEF said they expected either Trump or Harris to fully implement the economic policies they’ve identified on the campaign trail, but the assumption is that deficits will continue to climb no matter who is in the White House.

“If we're not playing nice in the sandbox with our allies, and they're more incentivized to look for other places to put their money – whether that's gold or another country's bonds or something else — then there's a risk that you have lots of supply, not enough demand,” said Rebecca Patterson, the former chief investment strategist at Bridgewater Associates.

That could cause yields to settle higher, which would push up the cost of capital and slow down growth, she added.

Sacrebleu! — From Bloomberg’s Alice Gledhill and William Horobin: France, “a nation whose bonds were historically seen as a proxy for German bunds, the region’s safest asset, now finds itself recast as a poster child for fiscal incontinence.”

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2024 ELECTION

Punting on collections — The Biden administration is delaying the collection of defaulted student loan debt for millions of Americans until after the November election, Michael Stratford reports.

The decision avoids the possibility that the Education Department would begin garnishing wages, tax refunds and Social Security benefits of defaulted borrowers just as they’re heading to the polls in the coming weeks. And it also prevents the potential awkward timing of resuming collections while Vice President Kamala Harris is running her campaign on a promise to continue providing student debt relief to borrowers.

The administration said it won’t reinstate the federal government’s most powerful student debt collection powers — which have been turned off since March 2020 – until next year. “Defaulted borrowers won’t see collections until 2025,” a White House spokesperson said in a statement.

Harris’s econ messaging — From Victoria: “President Joe Biden launched a large-scale experiment during his first term, aimed at boosting American manufacturing, expanding green energy, and making the economy more resilient in the face of disruptions. His vice president isn’t really running on it. Why? For starters, these are policies that take time, and voters don’t give credit for what hasn’t happened yet.”

— To wit: A new Quinnipiac poll gave Harris a three-point lead over Trump in Pennsylvania, but Trump had overtaken her in Michigan and Wisconsin.

A billy — The Harris campaign says it’s raised more than $1 billion in less than three months, according to The NYT’s Shane Goldmacher and Maggie Haberman. The campaign has not released September fundraising totals “out of concern that bragging about the gush of donations could diminish donor interest in the race’s final weeks.”

Uh-oh! — Bridgewater Associates shorted Pennsylvania companies like U.S. Steel and Hershey when Republican Senate candidate Dave McCormick was CEO, according to CNN’s Isabelle Chapman, Majlie de Puy Kamp and Casey Tolan.

Jobs report

Jill Whitelaw has joined the Managed Funds Association as a vice president and senior counsel of regulatory affairs. She was previously an executive director at Morgan Stanley Investment Management.

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