Weekly Musings – How CME Fedwatch changed for the week ending June 9, 2023

11 Jun 2023 , 09:19 AM

However, there was an increase in the probability of rates going up to the 550-575 bps range as also the probability of a sharp rate cut, even in 2024 continued to fall. For the week to 09-Jun, the only big data point that came out was the employment data. It saw a sharp 30 bps jump in joblessness in May 2023 from 3.4% to 3.7%. The figure is still defined as full employment, but it shows that the persistent hawkishness of the Fed is showing up in corporate bottom lines and job creation. That is expected to cool inflation further and should give comfort to the Federal Reserve. Let us turn to the big drivers of the shift in CME Fedwatch during the week ended 09-Jun 2023? It was certainly a tepid week, but the real action could be visible in the coming week.

What impacted CME Fedwatch probabilities in the week to 09-June 2023?

If we look at the Fedwatch movement, markets continue to bet on a status quo in the June policy next week. However, the probability has come down from 75% to 70% over the week. That can be attributed to more of market based volatility. The FOMC, in its latest minutes, had indicated that June could be an experimental pause, although it would not change their stance on monetary policy too much. The markets are broadly expecting the Fed to honor that commitment although there is a very high probability being assigned to a rate hike in July, if not in June. Markets are expecting the hawkish undertone to stay.

The coming week will be a lot more critical in terms of Fedwatch triggers. Firstly, there is the all-important Fed policy statement coming next week. Apart from the rate action, the markets will be a lot more interested in the language of the Fed. Secondly, there is the US consumer inflation data expected in the coming week. The markets would be keen to examine if the downtrend in inflation is maintained in the coming week too.

Recap – CME  Fedwatch for the week ended 02-June 2023

Here is a quick recap of how the CME Fedwatch looked like for the previous week, before the above data points were factored in.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450- 475	475- 500	500-525	525-550	550-575
Jun-23	Nil	Nil	Nil	Nil	Nil	Nil	Nil	74.7%	25.3%	Nil
Jul-23	Nil	Nil	Nil	Nil	Nil	Nil	Nil	32.1%	53.5%	14.4%
Sep-23	Nil	Nil	Nil	Nil	Nil	Nil	3.9%	34.7%	48.8%	12.7%
Nov-23	Nil	Nil	Nil	Nil	Nil	2.0%	19.6%	41.9%	30.4%	6.2%
Dec-23	Nil	Nil	Nil	Nil	1.0%	10.9%	30.8%	36.1%	18.2%	3.1%
Jan-24	Nil	Nil	Nil	0.8%	8.5%	26.1%	34.8%	22.4%	6.6%	0.7%
Mar-24	Nil	Nil	0.7%	7.4%	23.7%	33.6%	24.1%	8.8%	1.6%	0.1%
May-24	0.1%	1.7%	10.0%	25.3%	32.1%	21.7%	7.7%	1.3%	0.1%	Nil
Jun-24	1.3%	7.1%	20.0%	29.7%	25.3%	12.6%	3.5%	0.5%	Nil	Nil

Data source: CME Fedwatch

What did the CME Fedwatch for the previous week ended 02-Jun 2023 depict? It has hinted at a pause in the Fed minutes but the undertone of the Fed appeared to be that it was not done with rate hikes. That has been the undertone of the Fed over the last two weeks. Also, there is tendency for the market to converge with the Fed view point. About a month or so back, the markets grossly diverged from the Fed on the likelihood of rate cuts in 2023. Now even the market appears convinced that rate cuts are almost ruled out in the current year and would also be more calibrated in the next year. In the previous week, the markets continued to hint at a likely hike of 25 bps and a worst case hike of 50 bps.

CME Fedwatch for the latest week ending 09-June 2023

Let us now look at how the CME Fedwatch looked as of the latest week i.e., the period ending 09-June 2023.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450- 475	475- 500	500-525	525-550	550-575
Jun-23	Nil	Nil	Nil	Nil	Nil	Nil	Nil	70.1%	29.9%	Nil
Jul-23	Nil	Nil	Nil	Nil	Nil	Nil	Nil	30.1%	52.8%	17.1%
Sep-23	Nil	Nil	Nil	Nil	Nil	Nil	2.4%	31.9%	50.0%	15.7%
Nov-23	Nil	Nil	Nil	Nil	Nil	0.9%	14.0%	39.0%	36.5%	9.5%
Dec-23	Nil	Nil	Nil	Nil	0.4%	7.1%	25.7%	37.8%	23.9%	5.1%
Jan-24	Nil	Nil	Nil	0.3%	4.3%	17.9%	32.7%	29.8%	13.0%	2.1%
Mar-24	Nil	Nil	0.2%	3.0%	13.5%	28.0%	30.7%	18.4%	5.6%	0.7%
May-24	Nil	0.2%	2.9%	13.3%	27.7%	30.7%	18.5%	5.8%	0.8%	Nil
Jun-24	0.1%	1.8%	9.1%	21.8%	29.5%	23.5%	11.0%	2.8%	0.3%	Nil

Data source: CME Fedwatch

Broadly there are two trend shifts in the latest week, although both the trends are relatively minor in its impact. Firstly, the probability of rates going up to the range of 5.50% to 5.75% has gone up. That reflects the thinking that the Fed may prefer to tighten more than required and would even be ok with erring on the side of caution. The second trend is that, on the subject of rate cuts, the markets are increasingly aligned with the view of the Fed that there would not be negligible rate cuts in year 2023. Even for 2024, the peak rate cut assumptions are now down to just 75 bps from current levels as compared to expectations of a 200 bps rate cut about 1 month ago. One big shift in the last two weeks has been the market aligning itself more towards the Fed language rather than diverging on expectations.

Key Fed triggers for the coming week

The next week will be a busy week for the CME Fedwatch as there are a number of data points expected. Here is a sampler.

1. Firstly, the impact of the jobs data announced last week is likely to continue. The jobs added were much lower and as a result the unemployment rate went up by 30 bps to 3.7%. That is something the Fed has been targeting as a sharp spike in unemployment automatically neutralizes the higher purchasing power proffered by the post pandemic liquidity infusion. But we will need more jobs related data points.

    

2. The big event this week will be the Fed policy statement. The general expectation is that the Fed may pause in June with a strong likelihood of a 25 bps rate hike in July. However, the equations may change if the Fed decides to persist with another rate hike in June itself. That possibility cannot be ruled out.

    

3. Consumer inflation will be another key data point from the US this week. While the Fed still uses PCE inflation for its rate decisions, the consumer inflation is a good lead indicator. In recent months, the MOM inflation has shown upward pressure, which hints at rates starting to fall slower. That is also likely to impact the Fed stance.

    

4. One thing the markets will expect this week from the Fed is indications on peak rates. Markets are divided between expectations of a 25 bps hike and a 50 bps hike before peak rates are reached. A statement from the Fed on peak rates will offer a lot of clarity to the markets.

The coming week will be crucial for the CME Fedwatch. While jobs data is a done deal, the markets will await the Fed policy statement and the inflation data for greater clarity on the Fed stance.