ECONOMY: The Conference Board’s consumer confidence index is following the pattern seen in previous recessions. Sharp month-to-month drops tend to occur in the midst of recession. In the last recession in 1990 and 1991, the Conference Board’s consumer confidence index fell roughly 40 points in three months. Similar to the last plunge, the current plunge is almost certainly rooted in the weakening of the labor market. A spate of layoff announcements, combined with sharp increases in jobless claims clearly suggests that the labor market has indeed weakened sharply. The Conference Board’s survey tends to capture labor market trends better than most consumer confidence indicators. This therefore elevates the importance of today’s data and points to sharp weakness in the upcoming employment report. The indicators appear to point to a drop of 300k but an even larger drop is possible given the extraordinary circumstances now impacting labor market trends. The plunge in consumer confidence suggests that economic realities have begun to displace the feelings of patriotism that had held confidence relatively steady in recent weeks. Economic realities usually become the dominant influence on the Conference Board’s consumer confidence index because 60% of the index is based on the assessment of current conditions. Expectations make up the balance. Historically, the index on the assessment of current conditions has been a better predictor of future spending than the expectations component. This makes sense; the wherewithal to spend is more important than expectations about the future. It doesn’t do an individual any good if they’re out of a job but feel good about the future. The confidence drop occurred in nearly all of the major regions of the country with particular weakness in the east south central, where the consumer confidence index fell to 68.5 in October from 94.7 in September. The consumers’ assessment of the jobs market is telling. Only 21% rated jobs as “plentiful” compared to 27.1% in September and 50.0% a year ago. Fully 20.7% rated jobs as “hard to get” compared to 20.0% a year ago. One piece of good news in the report was an increase in the percentage of people who plan to buy an automobile. No surprise there, however, given widespread reports of strong sales related to zero financing offers.
FED: The November Fed Fund futures contract is now pricing in as much as a 65% chance of a 50 basis point rate cut on Nov. 6. Assuming the daily effective Fed Funds rate exactly matches the target, a 25 basis point cut is priced into the November contract at 2.30% and a 50 basis point cut is fully priced in a 2.10%. With the contract now at 2.17%, the market is leaning more and more toward a 50 basis point cut as the most likely outcome of the Nov. 6 meeting. And the December contract, at 1.995%, is fully pricing in 50 basis points in cuts between now and the Dec. 11 meeting and as much as a 35% chance that the Fed follows up a 50 basis point cut in November with another 25 bps in December. The February 2002 contract, now at 1.89%, also suggests the Fed won't stop at 2%. At its current level, the contract is pricing in about a 40% chance that the Fed cuts rates from 2% to 1.75% at the January 29/30 meeting |
