Flocking Doves Tomorrow?

Stock prices rose again today as the 10-year bond yield fell. Investors anticipate that tomorrow's employment report for August will be weak. If so, then it is a sure bet that the FOMC's majority will turn dovish and will vote to cut the federal funds rate on September 17. Indeed, the odds are up to 99.4%, according to the CME FedWatch Tool. Stock investors must be thinking that if the report is better than expected, that's bullish for earnings. So another postponement in rate cutting by the Fed is no problem for the stock market. If the jobs report is weak, then the FOMC will deliver a Fed Put in two weeks. So the consensus is that there is no downside, only upside.

Our main objection to a rate cut is that it will probably fuel a meltup in the stock market, especially if most of the data up ahead confirm the resilience of the economy. Indeed, real GDP is on track to increase 3.0% during Q3 after rising 3.3% in Q2, according to the Atlanta Fed's GDPNow (chart). The Citigroup Economic Surprise Index is solidly in positive territory at 25.8 today.