The Fed Will Cut Rates Multiple Times in 2020

While the Fed and Chair Powel indicated a long pause in activity, they are likely to be forced into more cuts in 2020, says Landon Whaley.

There is a weekly paper in the small city where I live that covers all the local comings and goings. On the last page is a section called “The Rant.” It’s a place for people to unload about everything that awakens the rage inside them. People rant about everything from a lack of parking to the person in front of them at Starbucks with their face buried in their phone when it’s time to order: “You, mid-20s guy in a blue check shirt at Starbucks on Route 29 Wednesday, stop playing Plants vs. Zombies on your iPhone while listening to Nickelback, and order your Double Venti Half-Soy Nonfat Decaf Iced Vanilla Frappuccino. Some of us actually have to work for a living.”

My rant this week comes courtesy of Jerome Powell and the Federal Reserve.

As expected, the Fed left rates untouched at last week’s meeting and then went a step further by indicating no further rate cuts in 2020.

Let me be clear and concise: The Fed will cut rates multiple times in 2020, and over -100 basis points. The Fed is woefully behind the rate cut 8-ball!

Am I a long-lost descendant of Nostradamus? No. Do I have a crystal ball? No.

I have something better than psychic abilities or crystal balls; I have data.

Allow me to explain. We’ve documented through this publication, as well as Gravitational Edge, the plight of the U.S. economy since growth peaked back in Q3 2018. The executive summary is that U.S. growth has been slowing for five straight quarters (inclusive of Q4 2019) and that the downside move in growth is accelerating.

Just two weeks ago, in our U.S. Shift Work macro theme update, we discussed the fact that the ISM Manufacturing PMI just contracted for the third straight month, the first time that’s happened since the 2016 industrial recession. Manufacturing production growth has now contracted in four consecutive months and declined another 60 basis points in October, the largest contraction since 2015. Industrial production contracted for the second straight month, crashing -100 basis points (in year-over-year terms), which is the sharpest contraction since 2016.

If that wasn’t enough growth slowing data to convince you the Fed needs to play a game of “rate cut catch up,” last week’s release of the latest U.S. productivity growth rate showed the biggest decline in almost five years.
I can hear the perma-bulls now, “But Landon, that’s the manufacturing sector and the U.S. is a service-based economy.”
I’ve got some growth slowing data for the “consumer is healthy” bulls too!

The November reading of the ISM Services PMI slowed for the six-time in the last nine months. Retail sales growth has now slowed in two consecutive months and fell off a cliff in October, with the annual pace of sales dropping -100 basis points! U.S. retail sales don’t take a nosedive of this magnitude on a run of the mill basis; this is a huge red flag! Not only that, but the far more important (and rarely discussed) retail sales control group growth, which feeds directly into the GDP calculation, just plummeted to a seven-month low. Ruh-roh!

Despite nothing but growth slowing data as far back as October 2018, Jerome Powell had the audacity, the unmitigated gall, to say, "I don't think anyone saw the challenges we've seen this year."
This guy is arguably the most influential (unelected) person in the world as far as global capital markets are concerned, and he’s telling us the Fed didn’t see the current economic environment coming? Someone should get this guy a subscription to our institutional offering for the holidays.

To say the Fed just made a policy mistake and is ridiculously far behind the rate cut 8-ball is like saying the L.A. Lakers are a better team with Lebron James and Anthony Davis than they were prior to those signings. The Fed incorrectly believes it can hold rates steady throughout 2020, and investors’ expectations are dead wrong too.

Markets are currently pricing an 83.1% chance that the Fed keeps rates unchanged in Q1 2020, a 62.3% chance rates are still at the same level in Q2, and a 37% chance that rates stay constant for the entire 2020 calendar year.

For those in the nosebleed seats, let me state it one more time for the record: The Fed will make multiple rate cuts in 2020 and will cut a minimum of -100 basis points off the Fed Funds rate.

From a financial market perspective, don’t get complacent just because the U.S. has shifted from the most bearish of all economic environments, a Winter Fundamental Gravity, into Fall. Our models are indicating a high likelihood that the U.S. economy slips back into Winter during Q2 2020.

If the vast amount of U.S. data continues on its current trajectory, and the Fed doesn’t cut rates in March 2020, the U.S. will head back into Winter. When that happens, equity markets and other risk assets will trade as they did back in Q4 2018 and force the Fed’s hand. This Fed is not data-driven, its market-driven (and probably more than just a little bit POTUS-driven). If this “no rate cut in March, Winter FG in April” scenario unfolds, I’ll bet you dollars to donuts the Fed’s first rate cut in 2020 is a -50-basis point whopper!

I’ll leave you with one final thought, though it's not a data point per se but certainly something of a supportive tidbit.

The decade of the 2010s, which closes in 398 hours, is the only decade in U.S. history without the economy experiencing a recession. Despite what any Ivy-league educated economist would have you believe; economies do in fact cycle. We are currently 11 years and counting from our last recession, which doesn’t mean “this time is different,” it means the U.S. is several years overdue for a comeuppance, economically speaking.

No matter what Powell says or the President tweets, the U.S. economy is not currently in the Lego movie, where everything is awesome. These two guys and the broader market are going to get their wake-up call on Jan. 30, 2020, when the initial estimate of Q4 2019 GDP is released. The media and Wall Street types will navel-gaze the quarterly growth rate, which will start with a “0,” and the far more critical annual pace of GDP growth will have a “1” handle. You can book it.

While this GDP development will catch many investors offsides, those of us guided by the Fundamental Gravity playbook will continue to be positioned correctly. The U.S. is in a Fall FG for the remainder of December and Q1 2020. We’ve gotten paid being long energy stocks, commodities, and Treasury Inflation Protected Securities (TIPS) as well as utilities and REITs, and these markets will continue to offer low risk, high reward opportunities for us as we traverse the next four months.

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