Weekly Musings – CME Fedwatch change for week to October 13, 2023

16 Oct 2023 , 09:34 AM

FED MINUTES PLUS US INFLATION SETS THE TONE FOR CME FEDWATCH

The week had two major announcements. The Fed minutes announced a day ahead of the consumer inflation in the US, made it clear that inflation was far from over. However, the members of the FOMC (Federal Open Market Committee) differed on whether more rate hikes were needed. There was a consensus that the Fed will have to hold the Fed rates at elevated levels for a much longer period of time. The members also agreed that rate cuts would have to be back-ended, although members are OK with just one more rate hike.

What are the key takeaways? Firstly, Fed rates will stay above 5%, till the end of 2024, or even beyond. At the same time, Fed will also hold rates above the pre-COVID levels for a longer period till inflation starts to move towards the 2% mark. Fed rates are already well above the pre-COVID rates. Effectively, the US Fed may end up with 1 more rate hike in 2023 and possibly 2-3 rate cuts at the most by end of 2024. What we seen this week is a consensus emerging on this trajectory between the Fed language and the CME Fedwatch.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED OCTOBER 06, 2023

Here is a quick recap of how the CME Fedwatch looked like for the previous week to October 06, 2023, before the current week’s data points were factored in.

Fed Meet	375-400	400-425	425-450	450- 475	475- 500	500-525	525-550	550-575	575-600
Nov-23	Nil	Nil	Nil	Nil	Nil	Nil	72.9%	27.1%	Nil
Dec-23	Nil	Nil	Nil	Nil	Nil	Nil	57.6%	36.7%	5.7%
Jan-24	Nil	Nil	Nil	Nil	Nil	2.4%	56.7%	35.5%	5.5%
Mar-24	Nil	Nil	Nil	Nil	0.5%	13.2%	52.5%	29.5%	4.4%
May-24	Nil	Nil	Nil	0.2%	5.1%	27.3%	44.2%	20.4%	2.8%
Jun-24	Nil	Nil	0.1%	2.3%	14.9%	34.8%	33.7%	12.6%	1.6%
Jul-24	Nil	Nil	1.3%	9.1%	25.6%	34.2%	22.4%	6.7%	0.7%
Sep-24	Nil	0.7%	5.7%	18.4%	30.4%	27.6%	13.6%	3.3%	0.3%
Nov-24	0.4%	3.2%	12.0%	24.4%	29.0%	20.6%	8.5%	1.8%	0.2%

Data source: CME Fedwatch

There were several key event in the week to October 06, 2023. There were 4 broad factors that influenced the direction and colour of the CME Fedwatch during previous week.

• A number of senior FOMC members including Jerome Powell, Patrick Harker, Michelle Bowman, Mester, Waller and Williams spoke during the week. The message appears to be that hawkishness was the preferred choice, but the implementation would differ. it would be about holding rates higher and reducing rate cuts; rather than rate hikes. 

   

• Oil inflation remains the big issue. In the previous week, OPEC and Russia decided not to increase supply cuts. That toned down oil prices to $84/bbl. However, API crude stocks fell by 4.21 million barrels, which is nearly thrice the fall in the previous week. Overall, the signals for oil inflation are mixed, but the Israel Hamas war could hold the key.

   

• The previous week also saw a sharp fall in the Fed balance sheet to $7.95 trillion as measured by bond holdings of the Federal Reserve. The overall liquidity withdrawal from the US financial system has been $1 trillion in last 16 months. That is already a tightening measure and may reduce the need for aggressive rate hikes.

   

• The US trade deficit for August 2023 came in sharply lower at $58.3 billion compared to $64.7 billion in July That is likely to be favourable for the US dollar, so expect the dollar index to rally more from here.

It was the third week in succession that the CME Fedwatch did not see too much of fundamental change. Markets are pleased that the US may have managed a soft landing, although it may still premature to pop the champagne. Fed would want to use its hawkish options optimally and prudently; and that appears to be the strategy now.

CME FEDWATCH IN THE LATEST WEEK TO OCTOBER 13, 2023

The latest week to October 13, 2023 saw CME Fedwatch stable during the week. The consensus now seems to be that the Fed will hold rates at elevated for longer, but will not hike rats too much. Markets are still betting heavily on one more rate hike of 25 bps rate by the Fed, which could most likely happen in November itself. 

Fed Meet	375-400	400-425	425-450	450- 475	475- 500	500-525	525-550	550-575	575-600
Nov-23	Nil	Nil	Nil	Nil	Nil	Nil	93.8%	6.2%	Nil
Dec-23	Nil	Nil	Nil	Nil	Nil	Nil	69.6%	28.8%	1.6%
Jan-24	Nil	Nil	Nil	Nil	Nil	Nil	69.6%	28.8%	1.6%
Mar-24	Nil	Nil	Nil	Nil	Nil	16.7%	59.8%	22.3%	1.2%
May-24	Nil	Nil	Nil	Nil	6.0%	32.1%	46.4%	14.7%	0.8%
Jun-24	Nil	Nil	Nil	2.7%	17.6%	38.5%	32.3%	8.5%	0.4%
Jul-24	Nil	Nil	1.4%	10.4%	28.4%	35.3%	20.0%	4.3%	0.2%
Sep-24	Nil	0.7%	6.2%	20.1%	32.1%	27.0%	11.5%	2.1%	0.1%
Nov-24	0.4%	3.4%	12.9%	25.9%	29.7%	19.6%	17.0%	1.1%	Nil

Data source: CME Fedwatch

There are several triggers in the coming week, likely to impact CME Fedwatch. Here are 4 factors that were the key to the CME Fedwatch in the latest week to October 13, 2023. 

• The Fed minutes clearly indicated that the problem of inflation was far from over. However, the Fed statement also underlined that in future the focus would be on holding rates at elevated levels rather than raisin rates. The Fed also hinted that the rate cuts would now be back-ended.

   

• A day after the Fed minutes were announced, there was ratification from the Bureau of Labour Statistics on the consumer inflation. It came in flat at 3.7% for September, the same level as last month. However, the inflation was higher than street estimates, although most of the pressure came from the fuel inflation front.

   

• The oil inventories reported by the American Petroleum Institute (API) remained an important factor to determine oil inflation. For the week, oil inventories spiked by 12.94 million barrels, a signal of weak demand amidst rising prices. That is likely to tone down the pressure on fuel inflation, which has been the key inflation driver in recent months.

   

• Geopolitical risk was the big narrative in the week. The war between Israel and Hamas intensified during the week. Also, the US extended sanctions to tankers carrying Russian oil above $60/bbl. In addition, there are also discussions that the US may impose sanctions on Iran for supporting the Hamas. It looks like tumultuous times.

For now, the big data points are done and the PCE inflation and GDP numbers in the US are still some time away. Let us turn to what could influence the CME Fedwatch in the coming week.

TRIGGERS FOR CME FEDWATCH TO TRACK IN COMING WEEK

There are several triggers for the coming week, which is likely to impact the CME Fedwatch. Here are 3 such factors to watch in the coming week to October 20, 2023. 

• The big story in the coming week will be the evolving situation in the Middle East and West Asia. The Israel Hamas war looks like a long drawn war. In the event of the US extending sanctions to Iran, there is every possibility that the Strait of Hormuz may become the action point in the coming weeks. That will drive oil prices and have a deep impact on the CME Fedwatch trajectory in the coming week.

   

• There are some big speeches expected in the coming week. FOMC members, Harker and Williams are expected to be speaking this week. Also, Jerome Powell will also deliver a speech this week and the markets normally lap up to every word said by Jerome Powell as they offer fairly clear indications about the market. After all, the Fed does take its communication very seriously and has made a serious part of its monetary policy..

   

• The oil inventories reported by the American Petroleum Institute (API) will be a key factor. Last week the oil inventories in the US spiked by nearly 11 million barrels, which is a shift away from the trend of the last few weeks. That is likely to put pressure on fuel inflation, which has caused most of the inflation in recent months. 

In the absence of any major announcements  this week, the focus shifts to the Fed speak and the global geopolitical risk. However, there are important data points coming up on the last week of October like the PCE inflation and the GDP data (first estimate of third quarter) That should offer greater clarity on the road ahead for the CME Fedwatch.