The Week Ahead – Trick or Treat

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Halloween is a special time when intrepid children dress up and learn the time-honored tradition of trick-or-treating. With both my sons, we encouraged them to walk up to a strange house, pass the scary (and, at times, over-the-top) decorations, and ask someone they’ve never met for a treat. The kids had to gird their courage in order to walk past animatronic zombies and other gruesome monsters to declare “trick or treat!” After a few houses, they quickly mastered the task; any fear of monsters or social anxiety was long forgotten and they ran to the next house in order to get their well-earned prize. It’s a great display of fear and greed – two of the most powerful emotions that play out in all risk markets.

The day before Halloween, the Federal Reserve (Fed) will be winding up their meeting where they will almost certainly reduce interest rates for a third time this year. This latest reduction comes after they raised the overnight rate four times last year to a range of 2.25% – 2.50%. Market-based probabilities imply a 93.5% chance of a quarter-of-a-percentage point rate reduction to a range of 1.50%-1.75%. It’s not just our central bank that’s been easing monetary policy. All around the globe we’ve seen lower rates in response to sputtering economic growth. To wit, the Organization for Economic Cooperation and Development (OECD) is now forecasting global growth to come in at 3.3% for 2019 after seeing 3.6% last year.

We will also pay particular attention to the data coming in this week regarding housing and autos. These two economic bellwethers have benefited from lower interest rates by reducing mortgage and auto payments. Lower interest rates are also generally supportive of home and stock prices. Higher home values and 401Ks cause a so-called wealth effect, which helps consumers (68% of the domestic economy) feel more confident. Maintaining the current sanguine level of consumer confidence will be incredibly important as we enter the holiday season.

The tone of markets has definitely improved from the summer when fears of a global recession were ubiquitous. Among other things, recent strong corporate earnings reports have staunched the worst of investors’ fears, but weakness in manufacturing and concern over trade will continue to be important factors. Of course, all eyes will be on Federal Reserve Chairman Jerome Powell this week. The pricing of interest rate cuts may have run ahead of itself, leaving scope for disappointment in some asset markets if the Fed does not follow through. While the Fed will almost certainly deliver another “treat” to the market, the “trick” may come from the rhetoric regarding the potential for future rate hikes in 2020. Either way, it is sure that Halloween will be exciting for market participants and trick-or-treaters alike.

Data deck for October 28–November 1: