Weekly Musings – CME Fedwatch change for week to October 20, 2023

23 Oct 2023 , 07:04 AM

POWELL SPEAK HINTS AT MORE RATE HIKES, IF NEEDED

In terms of the data flows, there were not major data flows in the week, except for some critical speeches delivered by Fed chair Powell and governor Christopher Waller. The message in both these speeches appeared to be one and the same. The Fed refuses to comment on peak rates and there was assurance that rates would not go up higher. However, the concerns expressed by Powell was that the growth in GDP and consumer spending showed that the Fed policy was still not tight enough. That is clearly an indication that, if the need arises, the fed would be open to more rate hikes.

What are the key takeaways? Firstly, Fed rates will stay above 5%, till the end of 2024, or even beyond. The indications coming from the Fed speeches also indicate that there may not be any rate cuts till the end of 2024 and the CME Fedwatch also appears to corroborate that belief. Secondly, the statements also confirm, as does the recent long term survey by the FOMC members, that Fed will also hold rates above the pre-COVID levels for a longer period. This would be the case, at least, till inflation starts to move decisively towards the 2% target. Fed rates are already well above the pre-COVID rates. Thirdly, the probability of another rate hike in 2023 is gradually reducing. The market view appears to be that, in the absence any major price shocks, the Fed would prefer to hold rate at around the current level for a longer period. It would not want to reduce its leeway and flexibility by hiking Fed rates at this juncture. Once again, this week saw a broad consensus emerging on the Fed trajectory between the language of the Federal Reserve and the CME Fedwatch.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED OCTOBER 13, 2023

Here is a quick recap of how the CME Fedwatch looked like for the previous week to October 13, 2023, before the current week’s data points were factored in.

Fed Meet	375-400	400-425	425-450	450- 475	475- 500	500-525	525-550	550-575	575-600
Nov-23	Nil	Nil	Nil	Nil	Nil	Nil	93.8%	6.2%	Nil
Dec-23	Nil	Nil	Nil	Nil	Nil	Nil	69.6%	28.8%	1.6%
Jan-24	Nil	Nil	Nil	Nil	Nil	Nil	69.6%	28.8%	1.6%
Mar-24	Nil	Nil	Nil	Nil	Nil	16.7%	59.8%	22.3%	1.2%
May-24	Nil	Nil	Nil	Nil	6.0%	32.1%	46.4%	14.7%	0.8%
Jun-24	Nil	Nil	Nil	2.7%	17.6%	38.5%	32.3%	8.5%	0.4%
Jul-24	Nil	Nil	1.4%	10.4%	28.4%	35.3%	20.0%	4.3%	0.2%
Sep-24	Nil	0.7%	6.2%	20.1%	32.1%	27.0%	11.5%	2.1%	0.1%
Nov-24	0.4%	3.4%	12.9%	25.9%	29.7%	19.6%	17.0%	1.1%	Nil

Data source: CME Fedwatch

There were several triggers in previous week to October 13, 2023, which gave the first credible indications of the rate trajectory. Here is what was captured from the CME Fedwatch as of October 13, 2023. 

• In the previous week, the Fed minutes had clearly indicated that the problem of inflation was far from over. However, the Fed statement had also clarified that in the future, the focus would be on holding rates at elevated levels rather than raising rates. However, the message was clear rate cuts would be back-ended and that idea was neither under discussion, nor a priority item right now.

   

• The US consumer inflation had also been announced in the previous week, a day after the Fed minutes had been published. There was virtual ratification from the Bureau of Labour Statistics on the consumer inflation. While the Fed still looks at PCE inflation and not at consumer inflation, the September inflation at 3.7% was a signal that PCE inflation could also harden. Consumer inflation was higher than street estimates, although most of the pressure had come from fuel inflation.

   

• The oil inventories reported by the American Petroleum Institute (API) remained a factor that promised to mitigate oil inflation. For the week, oil inventories had spiked by 12.94 million barrels, a signal of weak demand amidst rising prices. That is likely to tone down the pressure on fuel inflation, but then geopolitical headwinds were always the big area of concern for the oil story.

   

• Oil price risk was visible in inflation estimates on two fronts. Firstly, the war between Israel and Hamas intensified and that was likely to keep oil prices on the boil above $90/bbl in the Brent market. In addition, the US sanctions on tankers carrying Russian oil above $60/bbl would further crunch the supply of oil from Russia and make the global oil market further undersupplied. On the anvil, are also US sanctions on Iran for supporting the Hamas; so overall it looks like tumultuous times for global macros.

The week to October 13, 2023 was all about the consumer inflation and the Fed minutes. Both had a very clear hawkish hint and a hawkish intent. That has set the tone for the CME Fedwatch, although the strategy seems to be higher for longer.

CME FEDWATCH IN THE LATEST WEEK TO OCTOBER 20, 2023

The latest week to October 20, 2023 saw CME Fedwatch stable during the week. The consensus now seems to be that the Fed will hold rates at elevated for longer. However, the markets are betting that rates will not be hiked in 2023 and any rate action, if necessary, will only happen in 2024.

Fed Meet	375-400	400-425	425-450	450- 475	475- 500	500-525	525-550	550-575	575-600
Nov-23	Nil	Nil	Nil	Nil	Nil	0.1%	99.9%	Nil	Nil
Dec-23	Nil	Nil	Nil	Nil	Nil	0.1%	80.1%	19.8%	Nil
Jan-24	Nil	Nil	Nil	Nil	Nil	0.1%	71.8%	26.0%	2.0%
Mar-24	Nil	Nil	Nil	Nil	Nil	13.0%	63.6%	21.7%	1.7%
May-24	Nil	Nil	Nil	Nil	5.3%	33.5%	46.6%	13.6%	1.0%
Jun-24	Nil	Nil	Nil	2.6%	19.3%	40.0%	30.2%	7.3%	0.5%
Jul-24	Nil	Nil	1.4%	11.6%	30.5%	34.7%	17.9%	3.7%	0.2%
Sep-24	Nil	0.7%	6.7%	21.4%	32.7%	26.0%	10.5%	1.9%	0.1%
Nov-24	0.3%	3.2%	12.8%	26.1%	29.9%	19.6%	6.9%	1.1%	0.1%
Dec-24	2.1%	8.4%	20.0%	28.2%	24.3%	12.7%	3.8%	0.6%	Nil

Data source: CME Fedwatch

There were several triggers that impacted the CME Fedwatch in the week to October 20, 2023. Here are 3 such factors that had an impact on the CME Fedwatch probabilities.

• The big story in the week was the situation in the Middle East and West Asia; which has been steadily worsening, with larger implications for oil prices and fuel inflation. The Israel Hamas war looks like a long drawn war and there is a strong possibility of the US extending sanctions to Iran. It remains to be seen how Iran reacts, if that were to happen and how it impacts oil movement through the Strait of Hormuz, one of the busiest sea routes for oil movement. That has kept the pressure on Brent Crude prices which closed the week above $92/bbl.

   

• Among the two big speeches in the week were the address by Fed chair Jerome Powell and governor Chris Waller. Both speeches have been careful to underline that high growth combined with tight labour market meant that more rate hikes could not be ruled out. That may be essential to offset the limited impact that rate hikes were having on inflation. The hint from Powell was of one more rate hike in 2023, although the Fed watch holds the belief that rate hikes may not happen at all.

   

• The oil inventories reported by the American Petroleum Institute (API) again showed signs of inventories falling. Last week the oil inventories in the US spiked by 12.94 million barrels, which is a shift away from the trend of the last few weeks. However, that is back to negative this week with oil inventories falling by 4.38 million barrels in the week against the market expectations of a fall of just 1.27 million barrels. Clearly, the pressure on oil prices is not going away in a hurry.

TRIGGERS FOR CME FEDWATCH TO TRACK IN COMING WEEK

There are several triggers for the coming week, which is likely to impact the CME Fedwatch. Here are 3 such factors to watch in the coming week to October 27, 2023. 

• On Thursday, the first advance estimate of Q3 GDP is likely to be released by the US Bureau of Economic Analysis (BEA). The quarterly GDP is expected to spike from 2.1% in Q2 to 4.1% in Q3, as per Bloomberg estimates. While this is only the first estimate and there are two more estimates remaining, the undertone appears to be that the GDP growth in Q3 would still be sharply higher. That is a strong case of a more cautiously hawkish policy by the Fed.

   

• The second big data flow this week will be the PCE (private consumption expenditure) inflation on Friday October 27, 2023. The Fed uses the PCE headline inflation and the PCE core inflation as the key triggers for its monetary policy approach. The headline yoy PCE inflation is likely to taper by 10 bps for September to 3.4%, led by core PCE inflation tapering by 20 bps to 3.7%. However, PCE core inflation MOM shows high frequency pressure and that is likely to depend on oil price impact. It will be something the Fed will be monitoring closely.

   

• There are some big speeches expected in the coming week; from Chris Waller and Jerome Powell. Since the Fed takes its communication very seriously, these speeches by Fed members generally offer fairly clear indications about the trajectory of monetary policy. The week will also see the MOM personal spending data disclosed and the growth is likely to increase from 0.4% to 0.5%. Overall, the data flows for the week appear to be tilted towards the Fed getting more cautiously hawkish.

The Fed has been going relatively slow on the bond book unwinding and in the last 15 months only about $1 trillion has been unwound. Obviously, the Fed is trying to avoid unnecessary disruptions and that is understandable. The message from the CME Fedwatch is clear. The Fed is likely to stick to its strategy of holding rates higher for longer and avoid further rate hikes at this point of time. We have to wait and watch for the November 01, 2023 Fed statement to see if the Fed has other plans in mind.