Fed forecasts question further rate cuts

• • • • The window for easing will close in early 2026 if the US economy tracks the median forecast, according to a model of the Fed’s past behaviour (see charts).
      • Policy expectations have shifted hawkishly in several countries since end-Q3, with moves mostly consistent with monetary trends (exception: Sweden) (see charts).
      • Chinese domestic demand indicators were weak but export strength is still delivering respectable industrial output growth – for now (see charts).
      • Japanese monetary trends have recovered but remain weak, while higher yields appear to be discouraging capital outflows (see charts).
      • The OECD’s German leading index slowed further, suggesting lacklustre upcoming business surveys (see charts).
      • UK GDP contraction is consistent with earlier monetary weakness but money numbers have partially recovered, arguing for tempered pessimism (see charts).
      • Will quality underperformance reverse? Quality bounced back before and after the last two housing cycle lows, with another approaching (see charts).

The Fed probability model will move out of the easing zone in February if the economy evolves in line with the median FOMC forecast:

Core inflation is forecast to remain above target, while the unemployment rate falls between Q4 2025 and Q4 2026.

A fall in the Treasury’s cash balance at the Fed lifted bank reserves, which will be supported by new Treasury bill purchases:

However, the Treasury balance isn’t forecast to decline further and reserves may remain at the bottom end of the recent range.

Bank deposit growth has cooled, partly reflecting strong inflows to money funds:

A rise in job openings in September / October is at odds with Indeed postings, although these have ticked up more recently:

Policy expectations have shifted hawkishly in several countries since end-Q3:

The yield moves are mostly consistent with six-month real narrow money momentum (rank correlation coefficient = +0.57), with Sweden a notable exception (i.e. rate expectations appear too hawkish):

Chinese domestic demand indicators were weak but export strength is still delivering respectable industrial output growth – for now:

Money / credit growth eased but remains mid-range by recent standards:

House prices continue to deflate:

CPI numbers have been lifted by gold jewellery prices but clothing and household appliances / services components have also firmed, i.e. deflationary pressures aren’t intensifying:

The authorities continue to cap the RMB vs. the US dollar, resulting in a fall vs. the basket:

Japanese monetary trends have recovered but remain weak:

Higher JGB yields appear to be discouraging capital outflows:

The OECD’s German leading index slowed further, suggesting lacklustre upcoming business surveys:

UK GDP contraction is consistent with earlier monetary weakness but money numbers have partially recovered:

Vacancies appear to have stabilised (official number this week):

US growth underperformed but quality caught a bid:

However, EAFE quality continues to languish:

Will quality underperformance reverse? Quality bounced back before and after the last two housing cycles lows, with another approaching: