This analyst says the Fed could slash rates by 4 percentage points.

But what is that reason? Sure, inflation is decelerating, but it’s still above target, and the economy has defied predictions all year that it would fall into a recession.

The issue is that prices may be falling too much — not for consumers, but for companies. Consider this chart from Morgan Stanley (eagle-eyed readers will remember the chart in this column last week). It shows that the goods component of producer prices tends to lead S&P 500 revenue growth, by about four months — and the recent readings of PPI suggest companies will have a tough time managing any revenue growth at all.

“Firms loaded up on expensive labor over the past two years on the expectation they could push elevated costs through to customers,” says Duy. “Firms don’t fully adjust prices for higher costs immediately. Instead, they assume they will raise prices over time at a faster pace than otherwise would have been the case.” If they can’t — and in a disinflationary environment, they won’t be able to — they will have to reduce labor costs.

Already, the hiring rate and job openings rate have come down, even after stellar third-quarter GDP numbers. “Firms will try to protect margins first by reducing job openings and hiring, a process already underway, and if that doesn’t work, begin layoffs, which has yet to happen. That process will eventually erode sales growth and further contribute to disinflationary pressures,” says Duy.

Another issue for companies is their financing costs. “That 8% loan was easy to manage when you could push through 5% price increases to customers. Not so much if now you can only push through 2%,” says Duy.

One more point is that the Biden administration has loaded the Fed board with doves — and even the “hawks” appointed in the Trump administration, like Christopher Waller, have changed their tune.

Duy doesn’t dismiss the 75 basis points of cuts the dot plot projected as impossible, but he think the “surgical cut” scenario is less likely than a more pessimistic outlook that would lead to more than 275 basis points of cuts — more than the 150 basis points expected by the market. “There remains an even more pessimistic ‘flip to stimulative policy scenario’ of 400bp of cuts,” he says. The Fed presently targets a rate between 5.25% and 5.5%.

Duy admits that’s a tough sell right now, given so many have been burned by recession calls for a downturn hasn’t come. “But now, after a massive disinflationary shock, is exactly when we can think again about recession dynamics,” he says.

The market

U.S. stock futures
ES00,
+0.38%

NQ00,
+0.20%
rose with the S&P 500
SPX
near a record high.

The buzz

Nippon Steel
5401,
-1.07%
agreed to buy U.S. Steel
X,
+25.95%
for $14.1 billion, or $55 per share, a 40% premium to Friday’s close, in a deal that would end independence for the 122-year-old company.

Nio stock
NIO,
+5.50%
surged in premarket trade on Monday after the Chinese EV maker said it’s received a $2.2 billion investment from an Abu Dhabi investor.

Illumina
ILMN,
+0.06%
will sell cancer-test maker Grail after latest antitrust ruling.

IBM
IBM,
-0.33%
reached a $2.3 billion deal to buy two units of a German software company from private-equity firm Silver Lake, in a deal meant to boost its AI and cloud offering.

Vodafone shares
VOD,
+4.16%
rose in London after Iliad proposed merging its Italian operations.

Analysts at Citi estimate an effective 6% supply reduction to the container industry if all trades via the Suez are re-routed through the Cape of Good Hope, after shipping giants including Maersk and Hapag-Lloyd paused transit following attacks. BP on Monday said it’s pausing tanker shipments.

Home-builder confidence data is due at 10 a.m. Eastern, in a week that will be full of housing data as well as a final flurry of pre-Christmas releases on Friday.

Best of the web

Trevor Milton, the founder of EV truck company Nikola
NKLA,
+0.96%,
will be sentenced in a fraud case.

Fat Leonard gets the last laugh in disastrous Navy corruption trial.

The robber barons of prison tech.

Top tickers

These were the top performing stock-market tickers as of 6 a.m. Eastern.

The chart

Andrew Greenebaum, senior vice president of equity product management at Jefferies, said there have only been four other times since 1990 when at least 45% of S&P 500 components have overbought relative strength index readings. Historically, it’s a good sign — the average gain after 12 months is 13%.

Random reads

A family on a fishing trip thought their sonar detected an octopus — it was a 150-year-old shipwreck.

Behind the viral holiday video put out by private-equity giant Blackstone.

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