Analysts at Barclays took note of the easing financial conditions amid softer data and the Fed’s dovish pivot last week, which prompted a massive rally in risk assets.
“This dovish turn may have backfired,” the analysts wrote in a note to clients, before adding that “the FOMC is caught in a circularity loop, as its intention to formulate policy based upon tightened conditions works to undermine this tightness.”
“We retain our view that data momentum will force another hike, though we push back the timing to January.”
They point out that the overall data suggests robust labor demand conditions, with nearly all industries experiencing growth in the previous month, even including the construction sector, which is particularly influenced by interest rate fluctuations.
“The Fed would need to affirm expectations of policy tightening in our baseline scenario, where activity remains resilient and disinflationary pressures remain sluggish.”
Barclays made adjustments to its GDP expectations as it now expects Q4 growth of 1.5%, instead of the prior 2%.