Ed Yadeni: Flocking Doves Tomorrow?

Stock prices rose again today as the 10-year bond yield fell. Investors anticipate that tomorrows employment report for August will be weak. If so, then it is a sure bet that the FOMCs 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 theCME FedWatch Tool.Stock investors must be thinking that if the report is better than expected, thats 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 Feds GDPNow (chart). The Citigroup Economic Surprise Index is solidly in positive territory at 25.8 today.

The above explains why both stock and bond prices rallied today following the release of Augusts ADP report, which showed private payrolls rising by just 54,000 during the month (chart).