Weekly Musings – CME Fedwatch change for week to September 29, 2023

2 Oct 2023 , 08:46 AM

Over the last few weeks, there had been divergence of views between the CME Fedwatch and the Fed statements. That seems to be a thing of the past as the market ambivalence appears to be vanishing. It is clear not that the Fed is almost done with rate hikes. Even if it hikes rates amidst recalcitrant inflation, the rate hike will be, at best another 25 bps from here. That will take the US Fed rates to the range of 5.50% to 5.75%. Anything higher than that looks unlikely. However, the strategy of the Fed is also becoming increasingly clear. Fed is likely to interpret hawkishness differently going ahead. It would mean that rates will be held at elevated levels for a longer period. In other words, the rate cuts would be limited to just about 2 rate cuts in 2024, which the median rates would stay above the 5% mark even all the way up to December 2023.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED SEPTEMBER 22, 2023

Here is a quick recap of how the CME Fedwatch looked like for the previous week to September 22, 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	73.7%	26.3%	Nil
Dec-23	Nil	Nil	Nil	Nil	Nil	Nil	54.8%	38.4%	6.7%
Jan-24	Nil	Nil	Nil	Nil	Nil	Nil	53.7%	38.8%	7.5%
Mar-24	Nil	Nil	Nil	Nil	Nil	9.7%	51.0%	33.1%	6.2%
May-24	Nil	Nil	Nil	Nil	3.3%	23.9%	44.8%	23.8%	4.1%
Jun-24	Nil	Nil	Nil	1.1%	10.3%	31.0%	37.7%	17.1%	2.7%
Jul-24	Nil	Nil	0.5%	5.5%	20.2%	34.2%	27.9%	10.2%	1.4%
Sep-24	Nil	0.3%	3.3%	13.7%	28.0%	30.7%	18.0%	5.3%	0.6%
Nov-24	0.2%	1.8%	8.6%	21.0%	29.4%	24.3%	11.6%	2.9%	0.3%

Data source: CME Fedwatch

The week to September 22, 2023 saw 3 important data points impacting the CME Fedwatch. Here is a quick look at the 3 key triggers.

• The Fed statement was the big event of the previous week to September 22, 2023. Despite the 70 bps spike in consumer inflation over 2 months and the 50 bps hike in PCE inflation, the Fed opted to hold status quo on rates. Fed hinted at one more rate hike this year, but the message was clear. Hawkishness has a new meaning. It means holding rates static at elevated levels for a longer period of time. Even Michelle Bowman admitted that hawkishness would now take the form of holding rates for longer.

   

• The real big disclosure came from the long term projection of growth by the Fed. For 2023 and 2024, the Fed has hiked its GDP expectation, but it has also hiked its inflation expectations. What makes a strong case for holding rates higher for a longer period. Rates are estimated at above 5%, even towards the end of calendar 2024.

   

• Initial jobless claims for the week were nearly 24,000 lower than expected. Strong and tight labour market has been the hallmark of the really and that means that the inflation monster would be tough to tame. Strong labour data implies higher wages and that offsets the impact of rate hikes on inflation. US economy is still near full employment.

The previous week gave a clear message that the Fed was not done with hawkishness, but it would take a new form. It would be implemented through longer pause on rates rather than hiking rates. After all, rates are already at a 22 year high in the US markets.

CME FEDWATCH IN THE LATEST WEEK TO SEPTEMBER 29, 2023

The week to September 29, 2023 saw the CME Fedwatch largely stable during the week. The agenda has been set that the Fed will hold rates at elevated for longer and that is reflected in the CME Fedwatch also. Not much has changed in the Fedwatch probabilities between the previous week and the current week. Markets are still betting heavily that rate cuts have ended with a small likelihood of a 25 bps rate hike in November or December 2023.

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	81.7%	18.3%	Nil
Dec-23	Nil	Nil	Nil	Nil	Nil	Nil	64.8%	31.4%	3.8%
Jan-24	Nil	Nil	Nil	Nil	Nil	Nil	64.8%	31.4%	3.8%
Mar-24	Nil	Nil	Nil	Nil	Nil	9.1%	60.1%	27.6%	3.3%
May-24	Nil	Nil	Nil	Nil	3.2%	27.1%	48.6%	19.0%	2.1%
Jun-24	Nil	Nil	Nil	1.2%	12.5%	35.5%	37.1%	12.4%	1.3%
Jul-24	Nil	Nil	0.6%	7.1%	24.4%	36.3%	24.3%	6.7%	0.6%
Sep-24	Nil	0.4%	4.4%	17.1%	31.3%	29.3%	14.1%	3.2%	0.3%
Nov-24	0.2%	2.5%	11.1%	24.6%	30.3%	21.3%	8.3%	1.6%	0.1%

Data source: CME Fedwatch

There were several triggers for the CME Fedwatch in the week to September 29, 2023. Here is a quick look at the 3 factors that had a strong impact on the colour of the CME Fedwatch. Of course, the broad trend was set by the Fed policy statement and the long term projections given out by the FOMC. Here are the 3 factors that influenced the current week.

• PCE inflation was the big data point for the week. The PCE inflation for August came in at 3.5% yoy but the MOM inflation surged to 0.4%. Most of the inflation pressure came from higher energy prices, even as food inflation and core inflation actually tapered. This is likely to offer a justification for the continued hawkish stand of the Fed officials.

   

• The other big data point in the week was the third and final estimate of Q2-GDP. It was retained at 2.1%, at par with the second estimate. That is in sync with the Fed projection of GDP growth for 2023 in the range of 2.1% to 2.2%. More importantly, the latest GDP data underlines the fact that hard landing of the US economy may not be a challenge any longer. The Fed may have actually succeeded in managing a soft landing for the US economy, even while using rate hikes to tame inflation. 

   

• There were key speeches in the week made by Jerome Powell, Neil Kashkari, and Michelle Bowman. While Powell and Bowman veered more towards a more hawkish guidance, Neil Kashkari leaned more towards a neutral stance. However, there seems to be a consensus in the FOMC now that the new approach to hawkishness in the coming months would be to hold rates at elevated for longer, and delaying rate cuts.

For now, the Fed has maintained status quo on rates, but the key data points like PCE inflation and GDP indicate that the Fed has reasons to persist with its hawkish stance for a longer period of time. After all, the Fed has to not only manage inflation, but it also has to manage inflation expectations.

TRIGGERS FOR CME FEDWATCH TO TRACK IN COMING WEEK

There are several triggers for the coming week. While there are no policy level announcements likely in the coming week, there are several triggers in the coming week, which could have a bearing on the CME Fedwatch. Here are 4 such factors to watch in the coming week. 

• There are a number of senior FOMC members would be speaking in the coming week. These include Fed chair, Jerome Powell, as well as other Fed governors like Patrick Harker, Michelle Bowman, Mester, Waller and Williams will be speaking during the week. The markets will be closely examining their wordings for cues on the future trajectory of rates and the monetary stance of the Fed.

   

• The crucial OPEC meeting is scheduled on October 04, 2023. The OPEC and Russia are likely to announce further and longer supply cuts and that is likely to keep the pressure on global oil prices. For the Fed, this is an important data point as energy inflation has bene the key driver of PCE inflation in the month of July and August.

   

• The unemployment rate to be announced this week will be a key factor in the Fed calculations. According to the Bloomberg estimates, the unemployment is expected to again come down from 3.8% to 3.7%. This will make the labour market tighter and inflation harder to control amidst rising wages. That has been one of the biggest challenges faced by the Fed in reining inflation.

   

• The other key factor driving oil inflation, and therefore monetary policy guidance, in the coming week will be the US oil inventories. The inventories fell by 2.17 million barrels last week and that trend has been continuing over the last few weeks. That is unlikely to change at short notice. That will keep the pressure on crude prices, and therefore on energy inflation.

With the PCE inflation and GDP data already out, the focus shift to the cues coming from the senior members of the FOMC. That will be the key to arriving at a consensus on the future trajectory of rates in the US economy. 

INDIA HAS ENOUGH DATA POINTS TO TAKE A CALL ON RATES

In the last couple of months, the RBI has been in a sort of dilemma. The inflation has been above the outer tolerance limit of 6% for 2 months in a row and energy inflation is not even properly factored into Indian CPI basket. With food prices not relenting, it looks like high inflation in India could last for much longer. What does that mean for India’s monetary stance, especially as the RBI October policy is coming up next week. Based on pronouncements and analyst expectations, it looks like the RBI may choose to wait out the October policy. It has held rates at 6.5% since February and the limits to US hawkishness has given some room for hope to the RBI and to the Indian economy.

However, in the case of India, the challenge is tad trickier. India already holds the distinction of being the fastest growing large economy (economies with GDP more than $1 trillion). The RBI would be happy that the US did not hike rates. But more importantly, the RBI would be pleased that the Fed would not work hawkishness by holding rates for longer rather than hiking rates. That reduces the risk of monetary divergence for India. Also, with core sector growth at 12.1%, it promises a smart lag effect on IIP and GDP. India cannot allow itself to miss that opportunity. For now, the RBI has a longer rope to evaluate options and that is the good news.