Across the Curve

UBS Preview of Economic Data Scheduled for November 04

FOMC preview:  “Extremely low…for an extended period”?

We expect no change in the Fed funds rate at Wednesday’s Federal Open Market Committee (FOMC) meeting, nor in the guidance about the future path of the funds rate. We expect the FOMC statement to repeat that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” That guidance will likely be changed well in advance of any rise in the Fed funds rate, and the timing of the change will be extremely important to markets. Some have speculated that changes could come as soon as the current FOMC meeting, and recent comments by Fed Vice Chairman Kohn might be interpreted—with some license—as supportive of that view. But we doubt that either the characterization of the “exceptionally low” funds rate or the promise of an “extended period” will be altered yet. (More below.)

Data preview: Nonmfg ISM & ADP leading up to FOMC announcement

(1) The nonmanufacturing ISM index will probably show little change in October (UBSe: 51.0, cons: 51.5) after rising back above the zero-growth 50 mark in September. Timely indicators in October have given mixed signals: jobless claims have fallen and equity markets increased during much of the month (positive), while consumer confidence has slipped (negative). At 51.0 (our forecast), the index would still show much improvement and would be consistent with continued growth at the start of Q4. (2) The ADP estimate of private payrolls will also be reported on Wednesday; the consensus expects a decline of 198k in Oct after -254k in Sep. However, the ADP series has not been particularly reliable in signaling the official BLS data recently. Specifically, the ADP data have been biased downward, with the initially-reported figures weaker than BLS private payrolls by 80k per month on average in the past four months. (3) The Challenger layoffs series (Oct) and weekly mortgage applications (week of Oct 30) will also be released on Wednesday.