Weekly Musings – CME Fedwatch change for week to May 03, 2024

6 May 2024 , 11:35 AM

WHAT THE FED SAID; AND WHAT IT ACTUALLY MEANT

The Fed statement presented by the Federal Reserve on May 01, 2024 and the interview of Jerome Powell that followed had some interesting statements. Here is a quick interpretation of what the Fed said, and what it means for the markets.

What the Fed said	What it actually means for the market
Rate cuts are ruled out till inflation was still a major issue	The Fed will wait for clear evidence that the inflation was moving decisively towards the 2% mark. Such a down move would have to be on a sustained basis, and not just random down moves.
Fed will reduce its bond tapering from $720 Billion a year to $300 Billion a year	The bond tapering was to reduce the size of the balance sheet of the Fed, which is, now, already down by $1.7 trillion. To avoid a liquidity crunch in the economy, the Fed will go slow and reduce the amount of balance sheet unwinding monthly till liquidity was comfortable
On Inflation front; Fed moves from “making progress” to “made meaningful progress”	Clearly, the Fed is paving the way for rate cuts at some time in the future, possibly September. That is the reason it has spoken about its inflation achievement in perspective. In a sense, that is correct if you compare the current inflation with 2022 peak inflation
Next move of the Fed will not be a rate hike	Equity markets interpreted it as an affirmative move confirming rate cuts. However, the Fed has just stated its current options; viz. either to cut rates or to hold rates higher for a longer period of time. Nothing more!
Fed will remain obsessed with inflation as it hurts the most vulnerable sections the most	That is the reason, the Fed has not only focused on the rate of inflation, but also on inflation expectations. The inflation expectations are about the credibility of the Fed and its ability and commitment to maintaining price stability in the US economy at all cost.
Energy and core inflation remain a challenge for the Fed	The gains from supply chains normalizing have brought down core inflation substantially lower. However, the energy inflation is a global phenomenon. These could prove to be the X-factors for the Fed in coming months.

One thing the Fed has admitted is that the bulk of the swing in inflation in recent months is coming from energy. That remains the X-factor for the Fed, especially with OPEC + Russia still controlling about 50% of global oil output.

FED WILL TAKE EACH MEETING AS IT COMES

In the last few months, while Jerome Powell has tried to paint a more optimistic picture of rates, it is the hawks like Michelle Bowman who have been arguing for holding rates higher for longer. In the previous policy in March 2024, the Fed chair (Jerome Powell) had committed that there would be 3 rate cuts anyways in the year 2024. That looks increasingly unlikely now, with the first rate cut likely to come only around September 2024 or later. That really does not leave enough time for 3 rate cuts in this year.

However, the Fed May 2024 meeting has not changed that rate cut estimate. Instead, it made a very cryptic statement that it would just take each Fed meeting at it comes and decide based on data flows on jobs, consumer inflation, PCE inflation etc. That is almost a tacit admission that the Fed may not be able to implement 3 rate cuts in the current year. For now, the markets are awaiting the indications of the first rate cut in this cycle. However, there are the likes of Morgan Stanley who believe that there could still be 3 rate cuts in the US in 2024, with the first rate cut happening in July 2024. We have to wait and watch!

RECAP – CME  FEDWATCH FOR THE WEEK ENDED APRIL 26, 2024

The week to April 26, 2024 was marked by higher than expected PCE inflation and lower than expected real GDP growth, again an outcome of high inflation. The CME Fedwatch has already reduced its expectations to just one rate cut in the year 2024.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	2.4%	97.6%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.2%	10.8%	88.9%
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	2.6%	28.6%	68.7%
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	1.0%	12.5%	43.8%	42.6%
Nov-24	Nil	Nil	Nil	Nil	Nil	0.2%	3.6%	19.6%	43.6%	33.0%
Dec-24	Nil	Nil	Nil	Nil	0.1%	1.5%	9.8%	28.8%	39.5%	20.2%
Jan-25	Nil	Nil	Nil	Nil	0.5%	3.9%	15.3%	31.9%	33.9%	14.4%
Mar-25	Nil	Nil	Nil	0.2%	1.8%	8.1%	21.4%	32.7%	26.7%	9.1%
Apr-25	Nil	Nil	0.1%	0.6%	3.5%	11.7%	24.5%	31.1%	22.0%	6.6%
Jun-25	Nil	Nil	0.3%	1.8%	6.9%	17.1%	27.2%	27.2%	15.5%	3.8%

Data source: CME Fedwatch

There were 3 critical triggers to watch out for in the coming week to May 03, 2024 with reference to CME Fedwatch.

• The GDP-FAE (first advance estimates) forecast for Q1-2024 came in sharply lower at 1.6%. The street expectation was between 2.4% and 2.8% GDP growth for Q1-2024. In sequential terms, the real GDP growth was sharply lower, compared to 3.4% and 4.9% in the previous two quarters. However, the real concern was that this real GDP compression was triggered by sharply higher inflation.
• The other data point of PCE inflation during the week saw a spike of 20 bps to 2.7%; making it a 30 bps spike in 2 months. This comes on top of the CPI inflation also spiking over the last two months. March PCE inflation saw pressure from food inflation, energy inflation and core inflation. It also appear that core sector inflation gains had saturated.
• API crude stocks once again disappointed in the week to March 26, 2024. For the week, the API crude stocks were expected to increase by 1.800 Million barrels. Instead, it fell by -3.230 Million barrels. That was a key factor in the Brent Crude prices spiking to above $89/bbl in the previous week. The risks to energy inflation remain an overhang.

Let us turn to the key drivers of the CME Fedwatch for the latest week to May 03, 2024. Of course, the big data point in the week was the Fed policy statement.

CUT TO PRESENT: CME FEDWATCH IN WEEK TO MAY 03, 2024

The latest week to May 03, 2024 saw the CME Fedwatch continuing to presume just 1 rate cut in 2024; with rather volatile probabilities. The big data flows in the week was the Fed policy statement and the interview by Jerome Powell post the meeting.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	8.4%	91.6%
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	2.4%	32.5%	65.1%
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	1.2%	17.4%	48.8%	32.6%
Nov-24	Nil	Nil	Nil	Nil	Nil	0.5%	7.4%	29.3%	42.6%	20.2%
Dec-24	Nil	Nil	Nil	Nil	0.3%	4.4%	20.1%	37.0%	29.7%	8.5%
Jan-25	Nil	Nil	Nil	0.1%	2.1%	11.4%	27.6%	33.8%	20.3%	4.8%
Mar-25	Nil	Nil	0.1%	1.2%	7.0%	19.9%	30.8%	26.7%	12.1%	2.2%
Apr-25	Nil	Nil	0.5%	3.3%	11.8%	24.0%	29.3%	21.2%	8.4%	1.4%
Jun-25	Nil	0.2%	1.8%	7.4%	17.6%	26.5%	25.5%	15.1%	5.1%	0.7%
Jul-25	0.1%	0.8%	3.9%	11.1%	20.8%	26.1%	21.7%	11.5%	3.5%	0.5%

Data source: CME Fedwatch

There are 3 critical triggers to watch out for in the coming week to MAY 03, 2024 with reference to CME Fedwatch.

• The big data point in the week was the Fed policy statement on May 01, 2024. The Fed continued to remain non-committal about the timing of the rate cuts. The only positive feature was that the Fed statement ruled out rate hikes; so, it could either be a rate cut or higher for longer in the current year.
• API crude inventories surprised on the positive side. After crude inventories fell -3.230 Million barrels in the previous week, it was expected to fall by another -1.500 Million barrels in the current week. However, the report by the API surprised on the positive side with a boost in inventories by +4.906 Million barrels. That was instrumental in pulling down the oil prices globally.
• The much awaited unemployment rate was also announced for April 2024. The rate unemployment actually rose by 10 bps from 3.8% to 3.9%. That is good news for the Fed as it shows that the labour market is finally coming back to balance.

Let us finally turn to the major triggers for the CME Fedwatch in the coming week, in terms of key macro data announcements.

TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO MAY 10, 2024

There are 3 critical triggers to watch out for in the coming week to MAY 03, 2024 with reference to CME Fedwatch.

• There are some major FOMC member speeches coming up next week. John Williams, Neil Kashkari, and Michelle Bowman are expected to speak in this week. The market will be closely tracking their speeches for any clues on the likely trajectory of interest rates in the US in 2024.
• The Fed balance sheet will be in focus this week. In the Fed statement, the decision was to reduce the pace of taper so that liquidity issue does not arise. The Fed bond book already stands at $7.362 Trillion and markets will wait for evidence of the taper slowing.
• API crude stocks will be in focus after the crude stocks saw a spike of 4.906 Million barrels in the previous week. US is producing oil at record levels and that is likely to tone down prices of crude, as it did last week. That would be positive for energy inflation.

Let us finally turn to the outlook for interest rates in the year 2024 and what the CME Fedwatch is indicating about the direction and the timing of rate cuts.

CME FEDWATCH NOW PENCILS TWO MORE RATE CUT IN 2024

There has been some interesting change in the latest week to May 03, 2024. As of the end of this week, the CME Fedwatch is pencilling in a 62% probability that the Fed would cut rates by 50 bps in year 2024. This is higher than just one rate cut pencilled in the previous week and this can be attributed to the Fed clearly ruling out any rate hike in this year. Rate cuts may be off the table for now, but the CME Fedwatch is looking at the first rate cut in September while Morgan Stanley has gone to the extent of predicting 3 rate cuts in 2024, with the rate cuts starting as early as July 2024 itself.

• What about the probabilities on the upside? After the GDP data and the PCE inflation data in the last week of April, there was a brief period when the CME Fedwatch anticipated a rate hike in 2024. However, that is off the table for now. It appears like the Fed rates have peaked at 5.25%-5.50%. Any move from here, would only trend lower.
• What about the downside consensus on the rate cuts side? On the downside, CME Fedwatch has become slightly more aggressive after the Fed policy statement. It has raised its projection from 1 rate cut in 2024 to 2 rate cuts in 2024. Now, the CME Fedwatch is pencilling in one rate cut in September and one more rate cut in December 2024. In addition, the CME Fedwatch is also pencilling a third rate cut by April and the fourth rate cut by June. The Fed assuring no rate hikes and not changing its 3 rate cut stance in its May 01, 2024 monetary policy statement, has made the market a little more adventurous in its expectations.

For the time being the FOMC members prefer to wait and watch, rather than jump into rate cuts. The Fed has not changed its 3 rate cuts stance; and Morgan Stanley believes that it is still possible. It suddenly looks like the markets have become a little more dovish and a lot more adventurous.