Apollo’s Slok Sees Rising Chance Fed Will Hold Rates in November

(Bloomberg) -- The chances that Federal Reserve officials will leave interest rates unchanged in November are mounting as the US economy powers ahead, according to Torsten Slok, chief economist at Apollo Management.

There are plenty of reasons for the robust US economy, in Slok’s view. A dovish Fed, elevated share and home prices, narrow credit spreads, as well as “wide open” corporate financing in both the public and private markets are just some of them.

“The bottom line is that the expansion continues,” he wrote in a research note dated Saturday, highlighting the Atlanta Fed currently estimates third-quarter GDP growth of 3.4%. He sees the US remaining on a no landing trajectory — where the economy keeps growing and inflation reignites.

US Treasuries fell steadily on Monday, sending the two-year yield above 4%, while longer-dated maturities led the latest market sell off. Option related trades weighed on 30-year bonds, with its yield just shy of 4.5%. The 10-year yield rose 9 basis points to 4.17%, and was trading at levels last seen late July.

Slok’s view seems to be gaining credence on Wall Street, as well as with some policymakers. Dallas Fed President Lorie Logan wants the central bank to move at a cautious pace, she said at an event Monday.

The Apollo chief economist called out “10 tailwinds” for the US economy, that “are increasing the likelihood that the Fed will have to reverse course at its November meeting,” and hit pause on its rate-cutting regimen.  

The central bank’s forecast from September, or dot-plot, revealed two more cuts indicated for this year after they made a jumbo 50 basis-point reduction at their last meeting bringing the target rate 4.75% to 5%.

Swaps traders are pricing 20 basis points of easing for the Fed’s meeting in November, below a full quarter-point. Traders now price 39 basis points for this year’s final two Fed meetings, raising the prospect of the central bank skipping one meeting, a view that has gained ground in the wake of a strong employment report for September. 

The US employment report for October will arrive on Nov. 1, ahead of the US election and a two-day Fed meeting the following week. 

As data continue to suggest an economy flirting with a “no landing” scenario, the bond market has endured a bruising October, with the Bloomberg Treasury index on course for its first monthly loss since April. The burst of hiring seen in September has jolted 10-year yields from a low of 3.69% at the start of the month.

Spurring the selloff is concern over US fiscal spending. T. Rowe Price, for one, doesn’t rule out a test of 5% in 10-year yields within the next six months, amid rising inflation expectations and “shallow Fed rate cuts.”

To Apollo’s Slok, consumers and companies are benefiting from having “locked-in low interest rates” for the economic cycle. Other tailwinds for the US economy include continued support from government spending through President Joe Biden’s economic development initiatives, the Chips and Inflation Reduction Acts, while “US election uncertainty will soon be behind us.” 

(Updates prices and adds details on Monday’s trading session starting in fourth paragraph)

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