Chief economist update: Bad news is good news is back

"Bad news is good news."

That phrase, born of the Great Recession of 2008, has become a staple and go to rationale each time equity markets jump on bad news.

Bad news!

Wall Street dropped - Dow down by 1.9%, S&P 500 down by 1.8%, Nasdaq down by 1.6%, Russell 2000 down by 0.9% -- on October 2 on the back of renewed recession fears, sparked by reports that the US Institute of Supply Management (ISM) manufacturing index dropped deeper into contraction territory from 49.1 in August to a reading of 47.8 in September - the lowest since June 2009 (GFC days) and lower than market expectations for an increase to 50.4.

Then it got worse.

While still in expansion territory, last night's ISM non-manufacturing survey report indicates that the US services sector's rate of expansion is slowing ... fast. The ISM non-manufacturing index fell by 3.8 points to a reading of 52.6 in September - the lowest since August 2016 and below consensus expectations for a gentler easing to 55.1.

The chart below shows the persistent trend decline in both the manufacturing and non-manufacturing sectors since the fourth quarter of 2018.

However, this new additional evidence of a slowing US economy onwards to a recession prompted a rebound on Wall Street: Dow up 0.5%; S&P 500 up 0.8%; Nasdaq up 1.1%; and Russell 2000 up 0.5%.

Bad, bad news is good news!

This is because it heightened speculations of more Fed rate cuts. The CME FedWatch Tool put the probability that the Fed funds rate would fall from the current 1.75%-2% to 1.5%-1.75% at the October FOMC meeting at 88.2% (from 77% a day earlier and 49.2% a week ago).

And then another cut in December to 1.25%-1.5%, with the odds lifting to 52.1% from 38.6% a day before and 18.9% last week.

Link to something 9L9NWDsR