Weekly Musings – CME Fedwatch change for week to March 08, 2024

10 Mar 2024 , 07:25 AM

JEROME POWELL TESTIMONY SETS THE TONE FOR THE WEEK

The big event of the week was the Powell Testimony to the Congress. Testifying before the Senate Banking Committee of the US House of Representatives, Powell underlined the broad contours of the rate trajectory. Powell was of the view that the Fed would continue to hold rates high till they were convinced that inflation was explicitly moving towards 2%. Here are the reasons that the markets were enthused by the Jerome Powell testimony.

• Even through Powell emphasized that the Fed was in no hurry to cut interest rates, there was also the hint that the policy rates in the US were at the peak. Powell told the Congress that it was unlikely that there will be any rate hikes this year; or probably even after that. In other words, the “Policy rates are likely at its peak for this tightening cycle,” made the difference. It enthused the markets that, rate cuts were on the table in 2024, subject to the US economy cooperating with the Fed.
• One of the positives from the Powell testimony came in the Q&A session after the testimony. In his response to a query, Powell asserted that recession or hard landing was now ruled out with the present situation and the future outlook for the US economy looking robust. Powell added that, apart from 3.1% growth in 2023, even Q1 growth for 2024 promises to be above 2% as per the Atlanta Fed GDP estimates.
• Powell also responded to the query on whether frenetic growth could make inflation control difficult. Powell underlined that there had been a clear slowdown since summer when Americans had splurged on concerts, films, and goods. Powell assured that the Fed could see signals of the economy cooling and that would mean that strong GDP and strong labour conditions will not be a barrier to lower inflation, any longer.
• However, the most important point was reserved for the end. On a question on the time table for the rate cuts, Powell held the stand that it would depend on inflation moving decisively towards 2%. However, Powell also asserted that he saw at least a few rate cuts in 2024, indicating that there could be a much faster fall in inflation in the first half of 2024, which would make rate cuts very likely in the second half.

The big takeaway from the Powell testimony to the Congress was that rate cuts were on the cards in 2024 and that the Fed expected favourable movement in inflation this year.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED MARCH 01, 2024

For the week to March 01, the big data flows were from the PCE inflation and the US GDP second estimates for Q4 2024. The data hinted at robust GDP estimates and personal consumption expenditure (PCE) inflation moving rapidly towards the 2% mark. The bigger solace was that the core PCE inflation was also falling rapidly.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Mar-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.0%	96.0%
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.6%	18.0%	81.4%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	0.3%	10.2%	52.8%	36.7%
Jul-24	Nil	Nil	Nil	Nil	Nil	0.2%	6.0%	34.8%	43.5%	15.5%
Sep-24	Nil	Nil	Nil	Nil	0.1%	4.4%	26.8%	41.1%	23.3%	4.3%
Nov-24	Nil	Nil	Nil	0.1%	2.4%	16.5%	34.5%	31.5%	13.1%	2.0%
Dec-24	Nil	Nil	Nil	1.6%	11.8%	28.4%	32.5%	19.2%	5.7%	0.7%
Jan-25	Nil	Nil	1.0%	7.5%	21.4%	30.8%	24.9%	11.4%	2.8%	0.3%
Mar-25	Nil	0.4%	3.6%	13.2%	25.2%	28.3%	19.3%	7.9%	1.8%	0.2%
Apr-25	0.3%	2.4%	9.6%	20.8%	27.2%	22.7%	12.1%	4.0%	0.8%	0.1%

Data source: CME Fedwatch

There were 4 critical triggers in the previous week to March 01, 2024 with reference to CME Fedwatch. Here is a quick trigger on what the week was all about.

• The Q4 GDP second estimate came in 10 basis points lower at 3.2%, as compared to the first estimate. However, it still holds the promise of full year GDP for 2023 at above the 3.0% mark. Atlanta Fed GDP for Q1-2024 is expected to be robust at 2.3%.
• The US BEA (Bureau of Economic Analysis) also announced the PCE (private consumption expenditure) inflation in the week at 2.4%. This is a full 20 bps lower than the previous month. Also, the fall in January PCE inflation had been supported by lower core PCE inflation, making the fall more structural and sustainable. . The PCE inflation is the critical input used by the Fed to take a decision on rate action.
• The API crude oil stocks went up during the week from 7.168 Million barrels in the previous week to 8.428 Million barrels in the current week. This is likely to keep the global oil price subdued since US oil inventories have a profound impact on global crude oil prices. However, energy inflation is still subject to the evolving Red Sea situation.
• The week also had its share of important views coming from the Fed governors like John Williams, Raphael Bostic, and Loretta Mester. The gist of the views was that there was no urgency to cut rates and the Fed could afford to wait and watch inflation for now.

Let us turn to some of the key triggers for the CME Fedwatch in the latest week to March 08, 2024 and the key data points to watch out for.

CME FEDWATCH IN THE WEEK TO MARCH 08, 2024

The latest week to March 08, 2024 was all about Jerome Powell’s testimony to the Congress on the trajectory of the Federal Funds rates. The table below captures the Fed Futures probabilities over the next 10 meetings of the Federal Open Markets Committee (FOMC) at the close of the week. The expectation is 75 bps rate cut by December 2024 and a total of 100 to 125 bps by April 2025; fully syncing with the Fed.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Mar-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	3.0%	97.0%
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.6%	21.2%	78.2%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	0.4%	15.1%	61.4%	23.1%
Jul-24	Nil	Nil	Nil	Nil	Nil	0.3%	10.3%	46.2%	35.7%	7.6%
Sep-24	Nil	Nil	Nil	Nil	0.2%	8.8%	40.8%	37.2%	11.8%	1.1%
Nov-24	Nil	Nil	Nil	0.1%	5.2%	27.2%	38.8%	22.6%	5.7%	0.5%
Dec-24	Nil	Nil	0.1%	4.0%	22.0%	36.0%	26.4%	9.7%	1.7%	0.1%
Jan-25	Nil	0.1%	2.7%	15.1%	30.1%	29.9%	16.3%	5.0%	0.8%	Nil
Mar-25	Nil	1.3%	8.3%	21.8%	29.9%	23.7%	11.3%	3.2%	0.5%	Nil
Apr-25	0.9%	6.3%	18.0%	27.6%	25.5%	14.8%	5.5%	1.2%	0.2%	Nil

Data source: CME Fedwatch

There were 3 critical triggers to watch out for in the coming week to March 08, 2024 with reference to CME Fedwatch.

• There was the all-important Fed testimony on February 06th in front of the Senate Banking Committee. In this testimony, under oath, Jerome Powell underlined that rate cuts would be a function of a sharp fall in inflation only. However, the Fed also hinted that they saw a number of rate hikes in 2024, which means that inflation moves should be favourable in the current year.
• The Fed balance sheet was in focus after it had tapered to $7.568 Trillion in the previous week. The Fed had hinted that it would go slow on Fed taper. Accordingly, in the current week, the Fed bond book only tapered marginally to $7.539 trillion. This is a conscious move to avoid any liquidity challenges at this juncture.
• In terms of Fed speak this week, Adriana Kugler spoke at length on the dual mandate that the Fed has been grappling with. The Fed had to contain inflation without impacting the labour market or impacting GDP. The gist of the presentation by Adriana Kugler was that the dual mandate had been achieved; which is a feel good factor for markets.

Let us now turn to the key triggers for the CME Fedwatch in the coming week.

TRIGGERS FOR CME FEDWATCH IN COMING WEEK TO MARCH 15, 2024

There are 3 critical triggers to watch out for in the coming week to March 08, 2024 with reference to CME Fedwatch.

• The big trigger this week will be the CPI inflation for February. On a yoy basis, the CPI inflation in the US is estimated to be at the same level of 3.1%. However, the core CPI is likely to come down further by 20 bps in the latest month to 3.7%, which is likely to be positive for the inflation outlook.
• Another important data point, this week, will be the Consumer inflation expectations to be announced on Monday. The inflation expectations set the tone for future inflation. It was 3.0% in the last reading and is likely to dip below 3.0% in the latest reading. That is likely to induce the Fed to take a more dovish approach.
• Among other data points, the OPEC monthly report and the industrial production will also be out in this week. OPEC is likely to sustain its supply cuts, but the recession in UK and Japan may continue to be an overhang. YOY industrial output is likely to improve from the last reading of 0.03%.

Let us finally turn to how the CME Fedwatch has now full converged towards the Fed point of view and the developments in the latest week.

CME FEDWATCH VS FED STANCE: SLIGHT DIVERGENCE THIS WEEK

It must be said that after the Powell testimony to the Congress, there is some amount of enthusiasm that has built up in the CME Fedwatch. In the previous week, the CME Fedwatch had fully converged to the Fed view of 75 bps in 2024. However, after the Fed testimony spoke in favour of rate cuts this year, the CME Fedwatch has slightly widened its view to a 75-100 bps rate cut in this year. For this week, there are 2 key takeaways in terms of the divergence / convergence between CME Fedwatch and the Fed stance.

• On the upside, there appears to be virtual consensus between the Fed and the CME Fedwatch on rates trajectory. The Fed has committed that the rates may have peaked at 5.25%-5.50%. The same was reiterated by Jerome Powell in the Congress testimony too this week. The Fed minutes have already averred that the probability of rate cuts was substantially higher than rate hikes. Apparently, additional rate hikes will only happen under very exceptional circumstances; if inflation was to go out of control. The Federal Reserve will still prefer to hold rates higher for longer rather than hiking rates. The Fed and the CME Fedwatch are almost entirely in sync on the upside.
• Now, there is substantial sync on the downside too; although there has been some divergence visible in the latest week, after the Jerome Powell testimony. The dichotomy on the downside had come down to zero in the previous week. The aggression of the CME Fedwatch had been toning down in recent weeks as the divergence was closing in. The Fed had originally committed to 3 rate cuts in 2024 and 4 rate cuts in 2025, without any time table for rate cuts. Till the previous week, the CME Fedwatch was also factoring in 75 bps rate cut by December 2024 and 100 bps to 125 bps by April 2025. In the current week, after the Jerome Powell testimony, the 2024 expectations have gone up slightly to the range of 75 bps to 100 bps. However, the broader expectation up to April 2025 continues to be in the range of 100 to 125 bps only, indicating that the outlook beyond December 2024 continues to be one of caution.

Fed has underscored that the last mile inflation was the toughest to handle, although the Fed appears confident that it should happen in 2024. In the previous week, the speeches by Christopher Waller and Lisa Cook had made a case for not cutting rates. However, this week, the speech by Adriana Kugler on the Fed achieving the dual mandate and the Powell testimony have given the doves some reason to rejoice. The outcome would still be data driven!