The US economy has remained resilient despite weakness in the manufacturing sector, with consumer spending making up for softness elsewhere. Even so, investors expect the Fed to once again issue an "insurance" cut that protects against negative fallout from the trade war and global economic slowdown.
The markets put the probability of a quarter point cut at roughly 94%, according to CME Group's FedWatch tool.
The view: "The deceleration in domestic demand, weaker wage pressures and declining inflation expectations suggests that economic weakness is spreading and that more action may be needed in the coming months," ING economists said in a recent note to clients.
They expect the Fed to follow up additional rate cuts in December and January. That schedule, however, is dependent on the data — and some important indicators will be delivered later in the week.
An advance estimate of third quarter GDP for the United States is expected to come in at 1.7%, according to a Reuters survey of economists. And the jobs report for October, which will post on Friday, is projected to show jobs growth substantially below the 136,000 jobs added in September. (Though the General Motors strike is expected to have a big impact.)
Such releases could make the case for the Fed to keep cutting beyond October.
Improvements in the trade outlook, on the other hand, could encourage the central bank to hit the pause button. The US Trade Representative's office on Friday said that the United States and China could be close to finalizing parts of a "phase one" deal.
"Although the US-China trade deal has yet to finalize, the Fed may feel that risk of a full blown trade war has sufficiently subsided for them to want to keep their powder dry," Bank of America Merrill Lynch strategist David Woo said Monday in a research note.
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