And so it begins, from Goldman which has been far too hawkish this cycle all along:
Relative to the turmoil in the financial markets, the economic numbers have been remarkably stable recently. Admittedly, jobless claims have risen and November payrolls fell somewhat short of expectations. But a report showing 155k new jobs and a decline in the (unrounded) unemployment rate to a new 48-year low of 3.67% is hardly weak in an absolute sense. Combined with the rebound in the November ISMs and firm consumer confidence readings, Friday’s report kept our current activity indicator (CAI) at 2.8% in November. This is down from a pace of 3.6% over the summer but still roughly 1 percentage point above the economy’s potential growth rate. In other words, our CAI implies that growth has transitioned from exceptionally strong to merely strong.
…much more significant change is the sharp tightening in financial conditions…for a variety of reasons—including an initial bout of concern about Chairman Powell’s “long way from neutral” remark, the inevitable slowing of GDP and profit growth from their exceptionally strong pace, and the broadening tension between the US and China—rising investor anxiety has pushed up our FCI by about 80bp since early October. If the FCI remains constant at its current level, we estimate that tighter financial conditions would take ¾-1pp off real GDP growth over the next year.
…the probability of a move in March has now fallen to slightly below 50%. A decision to pause in March would also be consistent with the likelihood that tariff-related uncertainty will look particularly high around the end of the 90-day grace period on March 1…this is a close call because there are still good arguments for a March hike, including a continued positive fiscal impulse that should keep growth above trend in Q1 even with tighter financial conditions, as well as a funds rate that remains at the very bottom end of the committee’s range of neutral rate estimates even after a December hike.
By contrast, the likelihood of sizable rate cuts—which would probably coincide with a recession or at least a serious recession scare—remains quite low over the next year or two, in our view. Current growth momentum is good, the FCI tightening is material but far from devastating, and the two key historical recession drivers—financial imbalances and a serious overheating problem—are still not visible. We therefore think that the storm will pass and this will keep Fed officials on a normalization path, albeit a more tortuous one than up to now.
My own view is that the Fed is one and done at least until the fiscal cliff passes. This is going to take some pressure off DXY and add AUD upwards pressure but unless some new breakthrough in the trade war is reached I still see a weakening China and RBA rate cuts from preventing the AUD from getting far:
Unless China suddenly rolls out some stimulus of course…