Weekly Musings – CME Fedwatch change for week to June 07, 2024

9 Jun 2024 , 10:30 PM

HOW JOBS DATA CHANGED THE NARRATIVE THIS WEEK

One of the most important high frequency indicators of the robustness of US economic growth is the non-farm payrolls data, which surged to 2,72,000 in May compared to 1.65,000 in April, but lower than 3,10,000 in March 2024. The estimate for May was 1,90,000, so the actual figure at 2,72,000 is substantially higher. That is a sign that the US economy is still robust, and that has reduced the percentage of persons unemployed to just about 4%. In the US context, 3.5% unemployment is classified as full employment so the US economy is pretty close to that mark. However, the problem arises where because such strong labour data is not compatible with rate cuts, according to the Fed. Here are some key takeaways from the non-farm payroll data for May 2024.

• Most to the job gains in the month of May 2024 were concentrated in sectors like healthcare, government, and leisure & hospitality. Job additions were healthcare (+68,000), government (+43,000), and leisure & hospitality (+42,000) jobs. These 3 sectors added a total of 1.53 lakh jobs, more than half the total accretion of the BFSI sector. In short, hiring is quite aggressive in the US.
• Let us turn to wages, another factor that has made the bond markets more cautious on the rates front. Regarding wages, the average hourly earnings were higher than expected. It has risen 0.4% on a MOM basis and it has also risen 4.1% on a yoy basis. What is more important is that the respective estimates for the two numbers were 0.3% and 3.9%; so, the actual jobs data was much stronger than anticipated.
• From a rate cut perspective, the Fed looks at two conditions for a rate cuts. Firstly, jobs growth should slow and the wage increases shall be tempered. However, both went against the Fed game plan. For instance, the job gains at 2,72,000 is almost 40% higher than the street expectations. The wage growth at 4.1% is also much higher than expected. These are clear indicators that the Fed should not be in a hurry to cut rates as the strong labour data is not in sync with.
• Experts see the jobs data as uncannily hawkish from the Fed’s perspective. This has also reduced the probability of rate cuts in September, which is when the rate cuts are expected to start off.

If you look back, the Fed has not lowered rates since the early days of the pandemic in 2020. However, between March 2022 and June 2024, rates were hiked by 500 basis points from 0.25%-0.50% to the range of 5.25%-5.50%. Let us now turn to how the CME Fedwatch panned out in the previous week to June 25, 2024.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED MAY 31, 2024

The week to May 31, 2024 was marked by the minutes of the FOMC and the key speeches by the FOMC members. The undertone of the members continued to be relatively hawkish as the inflation continues to be sticky, making a strong case to persist with the “higher for longer approach.” Here is how the CME Fedwatch chart looked ahead of the FOMC minutes being published.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550	550-575
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.4%	95.6%	Nil
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	0.5%	15.7%	83.8%	Nil
Sep-24	Nil	Nil	Nil	Nil	Nil	0.2%	7.5%	47.0%	45.2%	Nil
Nov-24	Nil	Nil	Nil	Nil	0.1%	2.0%	17.2%	46.6%	34.1%	Nil
Dec-24	Nil	Nil	Nil	Nil	1.2%	10.6%	33.7%	39.6%	15.0%	Nil
Jan-25	Nil	Nil	Nil	0.4%	4.3%	18.3%	35.7%	31.4%	10.0%	Nil
Mar-25	Nil	Nil	0.2%	2.2%	10.8%	26.4%	33.7%	21.4%	5.3%	Nil
Apr-25	Nil	0.1%	0.9%	5.1%	16.0%	28.8%	29.6%	16.0%	3.5%	Nil
Jun-25	Nil	0.5%	3.0%	10.5%	22.3%	29.2%	22.9%	9.9%	1.8%	Nil
Jul-25	0.2%	1.4%	5.9%	15.0%	25.0%	26.8%	17.9%	6.8%	1.1%	Nil

Data source: CME Fedwatch

There were 3 critical triggers in the week to May 31, 2024 with reference to CME Fedwatch. Here is what they implied.

• The key focus in Fed speak this week was the inputs coming from governors including John Williams, Michelle Bowman, Loretta Mester, and Neil Kashkari. Most of the speeches in the week typically leaned towards the hawkish side, especially after the FOMC minute and the lower than expected initial jobless claims last week.
• The big data point was PCE inflation for April which came in steady at 2.7% with core PCE inflation steady at 2.8%. While PCE food inflation was lower in April 2024, the PCE energy inflation bore the brunt as the disruptions in the oil supply chain continued to keep the prices of oil and energy products buoyant.
• The most important data point in the week was the second estimate of Q1-GDP, which came in 30 bps lower at 1.3%, compared to 1.6% in the first estimate. Also, this is sharply lower than 3.4% in Q4 and 4.9% in Q3. The good news is that low GDP can be a good reason for the Fed to finally embark on rate cuts.

Let us finally turn to the key monetary triggers in the coming week to June 07, 2024, which could have an impact on the CME Fedwatch.

CUT TO PRESENT: CME FEDWATCH IN WEEK TO JUNE 07, 2024

The latest week to June 07, 2024 saw the CME Fedwatch continues to factor in just 2 rate cut in 2024; with 45% probability of the event happening. However, probability of rate cuts did trend lower in this week after the stronger than expected jobs data.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550	550-575
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	2.24%	97.8%	Nil
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	0.1%	8.1%	91.8%	Nil
Sep-24	Nil	Nil	Nil	Nil	Nil	0.1%	3.8%	46.6%	49.5%	Nil
Nov-24	Nil	Nil	Nil	Nil	Nil	1.1%	15.9%	47.4%	35.6%	Nil
Dec-24	Nil	Nil	Nil	Nil	0.7%	10.2%	35.3%	40.1%	13.7%	Nil
Jan-25	Nil	Nil	Nil	0.3%	4.9%	21.3%	37.4%	28.4%	7.6%	Nil
Mar-25	Nil	Nil	0.2%	2.7%	13.6%	29.8%	32.7%	17.4%	3.6%	Nil
Apr-25	Nil	0.1%	1.1%	6.5%	19.3%	30.8%	27.3%	12.6%	2.3%	Nil
Jun-25	Nil	0.6%	4.0%	13.4%	25.5%	28.9%	19.4%	7.1%	1.1%	Nil
Jul-25	0.3%	1.9%	7.6%	18.0%	26.8%	25.3%	14.7%	4.8%	0.7%	Nil

Data source: CME Fedwatch

There were 3 critical triggers to watch out for in the week to June 07, 2024 with reference to CME Fedwatch.

• This point has been made several times, but the most important factor impacting the CME Fedwatch this week was the jobs data, which came in nearly 40% higher than estimate at 2,72,000 jobs. This robust jobs growth in the non-farm payrolls segment was combined with wage growth of over 4.1% CAGR. Such strong jobs numbers and robust wage hike imply that the time may still not be ripe for rate cuts.
• The Atlanta Fed estimate for Q2 GDP for the week, came in sharply lower at 1.6%, compared to the street estimate of 2.7%. This is a data slightly in contrast as lower than expected GDP growth would mean that the RBI tightening is working and would only encourage a shift from “higher for longer,” to actual rate cuts.
• The crude oil inventories as reported by API (American Petroleum Institute) holds the key to the energy inflation. Last week, the API inventories has seen a rather heavy drawdown of -4.156 Million Barrels. This week the crude oil inventories were again supposed to see a drawdown of -2.100 million barrels. When the data was announced, the actual crude stocks had seen an accretion of +1.233 million barrels. This is likely to keep energy inflation in check and also reduce the pressure on overall inflation. The other data point to watch will be the Fed balance sheet, which fell sharply this week from $7.284 Trillion to $7.256 trillion.

We are in the midst of interesting times with the last mile inflation still not giving too many clear signals. The CME Fedwatch has reconciled to the first rate cuts happening on in September; but the probability of the same is still highly volatile.

TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO JUNE 14, 2024

There are 3 critical triggers to watch out for in the coming week to June 14, 2024 with reference to CME Fedwatch.

• The US Fed will released its June monetary policy on June 12, 2024. The monetary policy statement is likely to be a lacklustre affair with the Fed maintaining status quo on rates. However, the Fed is expected to give out broad trajectory of rate cuts. It is most likely to start around September and then probably look at 3-4 rate cuts by the middle of 2025. The language of the Fed statement is likely to provide clarity on this subject.
• The all-important CPI inflation in the US for May 2024 will also be announced this week. While the core inflation is expected to taper this month by about 10 bps, the headline inflation is likely to stay static at 3.4%. With the Fed target still 140 bps aways, the Fed is justified in being cautious about rate cuts. Amidst the last mile concerns, the US Fed may make further rate cuts more dependent on incoming data.
• Like the Fed does every 3 months, it will also release the quarterly projections for GDP, inflation, labour, and the trajectory for rates. This is useful in that; it gives a trajectory of how rates will pan out in the US. The Fed has preferred to be additionally conservative in these quarterly projections.

We are in the midst of interesting times with the last mile inflation still not giving too many clear signals. However, rate cuts are unlikely to be taken up for consideration before September this year and the trajectory and the glide path for the reporters is likely to be a lot slower than was originally anticipated.

CME FEDWATCH STILL PENCILS TWO RATE CUTS IN 2024

Based on the latest flows, how have the probabilities of rate cuts changed in the week. During the week, the big data announcement was the non-farm payrolls, which showed addition of 2,72,000 jobs. This is against 1,65,000 last month and also higher than the monthly estimate of 1,95,000 jobs. Data flows will be more acute in the coming week with 3 major data points. Firstly, there will be the CPI inflation data. Then, there will be the actual policy statement presentation by the Fed. Being June 2024, the Fed will also release quarterly projections of key macros in this month. Let us look at the hawkish and dovish standpoint.

• What about the probabilities on the upside? After a fairly long gap, the probabilities on the upside were back last week. However, after the PCE inflation came in flat at 2.7%, and Q1 GDP second estimate got sharply downgraded, the probability of rate hike has once again been eliminated. The CME Fedwatch does not visualize any rate hikes, although the rate cut possibilities are also likely to be back-ended.
• What about the rate cuts on the downside. Rate cuts in July are almost ruled out with even Citi shifting to expecting the first rate cut only in September. As of date, there is a 50% probability that the first rate cut will happen in September 2024 and that is likely to be hold. That also provides sufficient data points to enrich the perspective on rate cut trajectory. The Fedwatch also presumes about 46% probability of 2 rate cuts by December 2024 policy. By July 2025, the CME Fedwatch is factoring in an 80% probability of 3 rate cuts and a 55% probability of 4 rate cuts by July 2024. However, these stories will evolve better only after the actual rate cut start.

At the end of the day, it will depend on whether the hawks within the Fed get the upper hand or the doves get the upper hand. For now, the hawks are calling the shots but things could change if data is supportive. The strong labour data has been a trigger for delaying rate cuts. We need to await other data points in the coming weeks.