Weekly Musings – CME Fedwatch change for week to August 30, 2024

2 Sep 2024 , 12:16 PM

WHY THE US Q2 GDP UPGRADE WAS IMPRESSIVE

During the week to August 30, 2025, the first important data from the US markets was the GDP data. Now you would recollect that the GDP growth had touched levels of 4.9% and 3.4% respectively in the third and fourth quarters of 2023. However, the first quarter of 2024 ended March 2024 had seen the GDP growth fall sharply to 1.4%, raising concerns about a hard landing of the US economy. However, the GDP growth nearly doubled to 2.8% in the first advance estimates of GDP growth put out towards the end of July 2024 by the US Bureau of Economic Analysis (BEA). To further add grist to the revival story, the second estimate of Q2 GDP has been further upgraded by 20 bps to 3.0%.

However, it is not just the overall real GDP growth number that is material. To get a more granular picture of the US economic growth, we look at the nominal growth, (growth before inflation). The table below, breaks up the nominal growth into key triggers to get a better understanding of the US growth story. GDP growth has been presented from the perspective of user-end items like private consumption expenditure, private domestic investment, international trade, and government spending to spot the quarterly trends.

GDP Data	Q3-2023 YOY (%)	Q4-2023 YOY (%)	Q1-2024 YOY (%)	Q2-2024 YOY (%) #
Private Consumption Expenditure	2.4	2.5	2.7	2.6
Gross Private Domestic Investment	0.3	2.0	3.7	6.1
Exports	-0.3	1.5	1.1	3.3
Imports	-2.7	-0.1	1.5	4.9
Government Spending & Investment	4.6	4.2	2.9	3.1
Nominal GDP Growth	5.9	5.7	5.8	5.9

Data Source: US Bureau of Economic Analysis (BEA) # = Second Estimate

Here is a quick look at each of the 4 drivers and how they have impacted the nominal growth and what it means.

• The nominal GDP for Q2-2024 at 5.9% is higher than the previous two sequential quarters. More importantly, the nominal growth in Q2=2024 is at par with Q3-2023 when the US had reported real GDP growth of an impressive 4.9%. What this affirms is that the growth in this quarter is at par with the record growth in Q3-2023 in economic activity terms and the difference is purely on account of higher inflation.
  
• Private consumption expenditure has been one of the key drivers of the US economy. That is slightly lower at 2.6% compared to 2.7% in the previous quarter. However, the contribution of consumption growth to GDP growth is higher than Q3 and Q4 of 2023. That means, the risk of consumption momentum slowing is not really an issue now.
  
• Let us now turn to gross private domestic investment. This is where the real surge in growth is visible. This figure spiked from 3.7% in the first quarter to 6.1%, showing a sharp spike in private investments. If you look at the last 4 quarters, the high growth in Q3 and Q4 of 2023 was driven by higher government spending. This quarter has shown more sustainable growth due to less reliance on government spending support.
  
• The good news is that international trade has picked up in this quarter and is likely to get better in 2024, as projected by the WTO. However, the spike in imports is not only sharper than exports, but also much sharper than the imports of the previous quarters. This could be the cost effect of shipments getting delayed due to the Red Sea crisis.
  
• The role of government spending in the GDP growth has come down sharply compared to Q3 and Q4 of the previous year. Instead, the latest quarter has seen a greater reliance on private consumption and private investment as triggers for growth.

What is the broad message? Clearly, the hard landing fears appear to be overstated. There is slack in the economy, so rate cuts can be taken up by Fed without worrying about a surge in inflation.

RECAP – CME FEDWATCH FOR THE WEEK ENDED AUGUST 23, 2024

Let us start with a recap of the week to August 23, 2024; and how the CME Fedwatch panned out during the week. By the week to August 23, 2024, the markets had more or less crystallized that the first rate cut would happen by September 2024 and also assigned a high probability that 3-4 rate cuts happening in 2024. Here are CME Fedwatch probabilities.

Fed Meet	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	24.0%	76.0%
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	7.3%	39.8%	52.9%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	2.4%	17.9%	44.1%	35.7%	Nil	Nil
Jan-25	Nil	Nil	Nil	0.2%	3.8%	20.2%	43.3%	32.4%	Nil	Nil	Nil
Mar-25	Nil	Nil	0.6%	5.4%	22.6%	42.2%	29.2%	Nil	Nil	Nil	Nil
May-25	Nil	0.4%	3.9%	17.3%	36.2%	33.2%	8.9%	Nil	Nil	Nil	Nil
Jun-25	0.3%	2.6%	12.1%	28.9%	34.4%	18.3%	3.5%	Nil	Nil	Nil	Nil
Jul-25	1.3%	6.5%	19.1%	31.2%	27.7%	12.2%	2.0%	Nil	Nil	Nil	Nil
Sep-25	3.5%	10.9%	23.2%	30.0%	22.4%	8.7%	1.3%	Nil	Nil	Nil	Nil
Oct-25	5.8%	13.5%	24.7%	28.3%	19.4%	7.1%	1.0%	Nil	Nil	Nil	Nil
Dec-25	9.0%	16.1%	25.5%	26.2%	16.5%	5.7%	0.8w%	Nil	Nil	Nil	Nil

Data source: CME Fedwatch

Just to recap, there were 4 major data points that gave the first credible signals of the intention of the Fed to embark on its first rate cut in September 2024.

• The Fed minutes of the July 31 meeting were published and the message was that the Fed was preparing for its first rate cut in this cycle. Remember that, the Fed has held status quo since July 2023. However, caveat of supportive data is still there.
  
• The big affirmation hint of rate cuts came from the Powell speech at Jackson H ole. Here, Jerome Powell declared that the conditions were ripe for the first rate cut. Powell has not committed to any dovishness beyond a single rate cut in September; for now.
  
• Initial jobless claims came in at 228K last week, and this week it surged higher to 232K. This is a clear indication that the labour market is under pressure and one has to correlate this with the final unemployment rate for August, to check if it crosses 4.3%.
  
• Crude oil inventories reported by the EIA, continued to be under stress. After an increase in inventories last week, the drawdown was expected at (2.000) Million barrels this week, but the actual drawdown came in sharply steeper at (4.649) Million barrels.

Let us cut to the present; and look at the triggers for CME Fedwatch in the latest week to August 30, 2024.

CUT TO PRESENT: CME FEDWATCH IN WEEK TO AUGUST 30, 2024

The latest week to August 30, 2024 saw the CME Fedwatch continue to factor in 3-4 rate cuts in 2024, but also suggested up to 8-9 rate cuts by December 2025.

Fed Meet	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	30.0%	70.0%
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	8.9%	41.8%	49.3%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	3.5%	21.8%	44.8%	30.0%	Nil	Nil
Jan-25	Nil	Nil	Nil	0.4%	5.5%	24.4%	43.1%	26.6%	Nil	Nil	Nil
Mar-25	Nil	Nil	0.9%	7.4%	26.2%	41.5%	23.9%	Nil	Nil	Nil	Nil
May-25	Nil	0.6%	5.5%	20.6%	36.9%	29.1%	7.1%	Nil	Nil	Nil	Nil
Jun-25	0.4%	3.8%	15.2%	31.1%	31.9%	15.0%	2.5%	Nil	Nil	Nil	Nil
Jul-25	2.1%	8.7%	22.1%	31.5%	24.6%	9.6%	1.4%	Nil	Nil	Nil	Nil
Sep-25	5.1%	13.4%	25.4%	29.1%	19.4%	6.8%	0.9%	Nil	Nil	Nil	Nil
Oct-25	8.2%	16.2%	26.2%	26.8%	16.4%	5.4%	0.7%	Nil	Nil	Nil	Nil
Dec-25	12.1%	18.6%	26.4%	24.4%	13.8%	4.3%	0.6%	Nil	Nil	Nil	Nil

Data source: CME Fedwatch

The week to August 30; had two very important data points viz., the second estimate of GDP and PCE inflation. Overall, there were 3 key data points to evaluate in the week.

• The second estimate of Q2 GDP was published on Thursday published by the US Bureau of Economic Analysis (BEA). The Q2 GDP growth estimate got upped by 20 bps to 3.0% in the second estimate, compared to 2.8% in the first advance estimates. The higher GDP growth as triggered by higher nominal GDP growth and lower inflation impact.
  
• PCE inflation for the month of July 2024 was steady at 2.5%. While core inflation and food inflation were flat, the energy inflation tapered by 10 bps in July 2024. However, what is of note is that the average PCE inflation in the US over the last 9 months has been 2.58%, making a strong case of low inflation to support rate cuts.
  
• The third trigger was on oil inventories and the jobs data. The crude oil inventories put out by the EIA had seen drawdown of (4.649) Million barrels last week. This week, the drawdown was expected at (2.700) Million barrels, but the actual figure was more sober at (0.846) Million Barrels. This positive for energy inflation. Jobless claims were marginally lower than expectations at 231K; so, there is no devil in these 2 data points.

Let us now turn to the big triggers for the CME Fedwatch in the upcoming week and how the triggers could play out.

TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO SEPTEMBER 06, 2024

The next week has limited data flows, so the dominant data point will be the unemployment report and the jobs data. There are 3 key data points to look out for.

• The big data point in the coming week will be the jobs report that will be published by the Bureau of Labour Statistics (BLS) on September 05, 2024. It is expected to taper from 4.3% in July to 4.2% in August. After the 100 bps spike in the unemployment data in the last 1 year, some sobering would be a welcome move.
  
• FOMC members, Christopher Waller and John Williams are scheduled to speak in this week. Their words will be closely tracked ahead of the expected first rate cut in September 2024. There are still a number of hawks in the FOMC and their buy-in will be the key to the Fed implementing the first rate cut on September 18, 2024.
  
• It will be a truncated week in the US as Monday is a holiday on account of Labour Day. Among the key data points in the coming week, the Atlanta Fed GDP estimate (currently at 2.5% For Q3) will set the tone for how growth pans out in the rest of 2024. Also, the initial jobless claims and the crude inventories will be key triggers for the CME Fedwatch.

Let us now turn to the final story of how all these flows added up to influence the CME Fedwatch probabilities in the latest week.

RATES TRAJECTORY – NOT AS ROSY AS THE FED FUTURES PICTURE

As the month of September starts, global markets have their fingers crossed on what the Fed will do when it meets on September 18, 2024. That is when the Fed is likely to take a call on rate cuts. For now. it looks like the first rate cut will happen in September. That is what Powell had almost indicated in unequivocal terms in his Jackson Hole speech. Also, the data points are supportive; in an affirmative sense and also in a negative sense. The affirmative trigger comes from lower inflation while the negative trigger could come from a slowdown in growth. The former is the preferred situation for the Fed.

However, the question are less on the commencement of the rate cut and more on the extent and trajectory of rate cuts. Jerome Powell has hinted at the first rate cut happening in September and despite the concerns of the hawks in the FOMC, the 25 bps rate cut is likely to happen in September. Even for the most hard-nosed hawks, there are very few reasons to justify delaying the rate cuts further from here. However, the Fed will be cautious that it does not go overboard. The dichotomy between what the Fed is saying, and what the CME Fedwatch is indicating is quite large and that may not be bridged easily. In the past, the Fed has had the last word and it could be a repeat this time too. Here is what the CME Fedwatch are indicating currently.

• Currently, the CME Fedwatch has assigned 100% probability to first rate cut happening in September. However, there is evidence of ultra aggression from the CME Fedwatch. The CME Fedwatch assigned 100% probability for 50 bps rate cut in November, while there is a 49.3% probability that there could be 75 bps of rate cuts by November 2024 itself. In addition, the expectation by December 2024 is a 100% probability of 75 bps rate cut and a 70.0% probability of a 100 bps rate cut.
  
• What about the CME Fedwatch expectations for 2025? By June 2025, the CME Fedwatch is factoring in 100% probability of 125 bps of rate cut and 97.5% probability to 150 bps of rate cut by June 2025. We now have CME Fedwatch expectations till December 2025. The CME Fedwatch is assigning a probability of 95.1% probability to 175 bps of rate cuts by December 2025 and an 81.3% probability of 200 bps rate cut by December 2025. This is much quicker than the most aggressive long term estimates by the Federal Reserve.

As in the past, the FOMC is still likely to chart its own path and the CME Fedwatch is likely to fall in line. However, this time around, there is market support for a more dovish approach to monetary policy. Fed has hinted at 1 rate cut in 2024; and probably a few more in 2025. It is hard to fathom what the Fed has in mind. The upcoming data flows, starting with jobs report for August 2024, will provide the first set of signals!