October rate cut highly likely amid growing job market risks

The Federal Reserve could move ahead with another interest rate cut later this month, Fed Chair Jay Powell signaled on Tuesday at the National Association for Business Economics annual meeting. He warned that the US labor market is showing further signs of distress, and that “downside risks to employment have risen,” marking his clearest indication yet that Fed officials see enough evidence to justify another quarter-point reduction in borrowing costs, the Financial Times reports.

The remarks solidified market expectations, with investors in federal funds futures now pricing in a nearly 100% chance of a cut at the Fed’s upcoming 28-29 October meeting, according to Bloomberg. “A rate cut in October is done,” former Fed economist and MacroPolicy Perspectives founder Julia Coronado told the business information service..

The Fed is now prioritizing risks to the job market over inflation. Despite delayed official data from the US government shutdown, private indicators and Fed research show a cooling labor market, as “both layoffs and hiring remain low,” Powell said. Powell noted few signs of broader or lasting price pressures, adding that long-term inflation expectations remain aligned with the Fed’s 2% goal. “There really isn’t a risk-free path now… but now the labor market has demonstrated pretty significant downside risks,” the Wall Street Journal quotes him as saying.

Feeling through the dark: The Fed remains divided, as 19 policymakers are seeing two more rate cuts this year, while nine others see one or fewer cuts as appropriate, Bloomberg wrote. This internal division, coupled with the lack of official economic data, increases the risk of policy mistakes. “If this goes on for a while… it could become more challenging,” Powell admitted regarding the data blackout.

REMEMBER- The Fed’s rate cut in September to 4%-4.25% was its first since last December, prompted by a sharp summer slowdown in hiring. However, the unemployment rate remained relatively low at 4.3% in August. The September jobs report is currently delayed due to the government shutdown, but Consumer Price Index data is still scheduled for release later this month.

AND- No more shrinking balance sheet? The Fed could also end its three-year quantitative tightening policy in the “coming months” to keep funding markets liquid, Powell said. However, the balance sheet is unlikely to return to pre-pandemic levels, with USD 1.1 bn higher liabilities and greater reserve demand, he said, adding the Fed’s pandemic-era quantitative easing “could have — and perhaps should have — stopped” earlier, though it likely wouldn’t have changed the economy’s course.

MARKETS THIS MORNING-

Asian markets are in the green this morning, with Japan’s Nikkei up 0.8%, while Hong Kong’s Hang Seng and the Shanghai Composite are hovering around the 0.3% mark. Wall Street futures are virtually unchanged amid blockbuster 2Q earnings for Bank of America and Morgan Stanley.

THE CLOSING BELL: TADAWUL-

The TASI rose 0.7% yesterday on turnover of SAR 6.7 bn. The index is down 2.9% YTD.

In the green: Petro Rabigh (+8.4%), Acwa Power (+6.0%) and TCC (+5.9%).

In the red: Alaseel (-6.2%), First Mills (-4.5%) and 2P (-4.3%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.2% yesterday on turnover of SAR 32.2 mn. The index is down 18.6% YTD.

In the green: CMCER (+8.5%), Apico (+7.8%) and Aldawliah (+6.2%).

In the red: NGDC (-9.3%), Lamasat (-5.5%) and Mobi Industry (-5.4%).

CORPORATE ACTIONS-

First Avenue For Real Estate Development’s board recommended a SAR 95 mn capital increase to SAR 300 mn, the firm said in a Tadawul disclosure yesterday. The move will be carried out via issuing nine bonus shares for each 20 existing ones and allocating up to 2.8 mn treasury shares for the employee stock incentive program. The company shares will rise to 300 mn shares after the boost. The move, which is subject to regulatory and shareholder approval, will be financed from the share premium account.

The Capital Market Authority approved Tihama Advertising and PublicRelationsCompany’s request to reduce its capital from SAR 400 mn to SAR 229.2 mn, cutting the number of shares from 40 mn to about 22.9 mn, it said in a statement yesterday. The move remains subject to shareholder approval at an extraordinary general assembly and completion of regulatory procedures.