Weekly Musings – CME Fedwatch for week to October 11, 2024

14 Oct 2024 , 06:56 AM

FED MINUTES BETRAY A FRACTURED  HOUSE

If you though that the minutes of the September 18, 2024 Fed monetary policy would read like a consensus decision to cut rates by 50 basis points, think again. The previous week saw the Fed minutes published, which showed that the debate among the members of the FOMC was  lot more fracture than what the final verdict manifested. The Fed decision is a median view and it glosses over the nuances of individual opinion. In most of these high powered meetings, there is a thin line between dissent, hesitation, ambivalence, neutrality, and assent. That was in ample evidence as displayed in the FOMC minutes published during the week. Michelle Bowman may have been the visible opponent of a 50 bps rate cut but the FOMC had its share of other sceptical members too.

Broadly, if you leave out the supporters of the 50 bps rate cut in the FOMC, the rest could be divided into 3 groups; Opponent, Ambivalent, and Indifferent. Let us understand why this sub-classification is important as it shows that the decision was something deeper. Michelle Bowman was firmly opposed to the decision to cut rates by 50 bps; since she felt that 25 bps would have been sufficient. Bowman had pointed to two distinct risks in a 50 bps rate cut. The first risk was that the markets may interpret the move as the Fed declaring victory over inflation. The second risk was giving out the image that the US growth story was in dire straits and it needs a monetary boost from the Fed. Both were distortions of the truth. As Bowman put it, if Fed wanted to send “an end of rate hike” signal; 25 bps was good enough.

Besides the unambiguous opposition of Bowman; there were also the Ambivalent and the Neutral members of the FOMC. The Ambivalent group was not sure if their ambivalence was strong enough reason to oppose the 50 bps rate cut with a dissent note. Then there were the members of the Neutral group. These people were largely sitting on the fence. They gave full support to the 50 bps rate cut, but would have equally done so had the FOMC proposed a 25 bps rate cut. In fact, several members who had voted in favour of the Fed decision to cut rates by 50 bps, appeared to indicating in the debate that they would be more comfortable with the Fed embarking on a 25 bps rate cut. To cut a long story short, the Fed vote may have been decisive, but the view behind the scenes was more fractured.

RECAP – CME  FEDWATCH FOR PREVIOUS WEEK ENDED OCTOBER 04, 2024

Let us start with a recap of the week to October 04, 2024; and how the CME Fedwatch panned out during the week. This was a week after the Fed cut rates by 50 bps, so the dovishness of the Fed and the sense of celebration was evident in the probability distribution of rate cut expectations. This week also had the important jobs data.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	97.4	2.6%
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	17.7%	80.2%	2.1%	Nil
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	14.8%	69.8%	15.1%	0.3%	Nil
Mar-25	Nil	Nil	Nil	Nil	Nil	11.8%	58.8%	26.0%	3.3%	0.1%	Nil
May-25	Nil	Nil	Nil	Nil	6.7%	38.5%	40.2%	13.1%	1.5%	Nil	Nil
Jun-25	Nil	Nil	Nil	3.9%	25.2%	39.5%	24.4%	6.3%	0.6%	Nil	Nil
Jul-25	Nil	Nil	1.3%	10.9%	29.9%	34.5%	18.5%	4.5%	0.4%	Nil	Nil
Sep-25	Nil	0.4%	4.6%	17.5%	31.5%	29.0%	13.6%	3.1%	0.3%	Nil	Nil
Oct-25	0.1%	1.4%	7.6%	20.8%	30.9%	25.4%	11.1%	2.4%	0.2%	Nil	Nil
Dec-25	0.4%	2.7%	10.4%	22.9%	29.8%	22.4%	9.3%	2.0%	0.2%	Nil	Nil

Data source: CME Fedwatch

The week to October 04, 2024 was dominated by the US unemployment numbers announced on Friday. There were 3 key data points in the week gone by.

• The US unemployment data for September was announced by the US Bureau of Labour Statistics (BLS) on Friday October 04, 2024. In the months of July and August 2024, rate of unemployment had spiked to 4.3% and 4.2% respectively. In absolute terms, the number of unemployed had been the same; which was the worry. For September 2024, the unemployment rate came down further to 4.1%. The Fed believes that a stable unemployment level of 4% is consonant with inflation target of 2%, although the eventual target would be to maintain inflation at 2% and unemployment at close to 3.5%. The Sep-24 jobs data also saw sharp addition in non-farm jobs.
• The all-important OPEC meeting concluded without any decision on production quotas. For now, the existing output quotas were to continue with the OPEC insisting on full conformity with these targets by all permanent and temporary members. For now, the OPEC may prefer to stay in the sidelines as the geopolitical risk has already spiked up the price of crude, with Brent closing in on $80/bbl and set to traverse higher. More so, since Iranian supply is supposed to be the X-factor due to the ongoing fracas with Israel.
• The week to October 04, 2024 also saw some important Fed speeches delivered by Jerome Powell, Michelle Bowman, and Adriana Kugler. It may be recollected that, in the FOMC vote, Michelle Bowman was the only dissent vote, but clearly there would have been a larger number of members would have been ambivalent about the extent of rate cuts. For now, barring Bowman, others like Fed chair Jerome Powell and Adriana Kugler have spoken out quite forcefully in favour of the 50 bps rate cut. The speeches also indicate that the Fed would stick to its guidance of 100 bps by end of 2024 and a total of 200 basis points from the peak by end of 2025.

Let us cut to the current week to October 11, 2024; which saw some very important data points for the CME Fedwatch.

CUT TO PRESENT: CME FEDWATCH IN WEEK TO OCTOBER 11, 2024

The latest week to October 11, 2024 saw the CME Fedwatch continue to factor in 3-4 rate cuts in 2024, but also toned down to just 175-200 bps rate cut by end of 2025.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	89.5%	10.5%
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	84.4%	15.0%	0.6%
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	68.5%	28.0%	3.3%	0.1%
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	65.8%	29.7%	4.3%	0.2%	Nil
May-25	Nil	Nil	Nil	Nil	Nil	43.5%	41.9%	12.9%	1.6%	0.1%	Nil
Jun-25	Nil	Nil	Nil	Nil	28.2%	42.5%	23.1%	5.6%	0.6%	Nil	Nil
Jul-25	Nil	Nil	Nil	9.9%	33.2%	35.7%	17.0%	3.8%	0.4%	Nil	Nil
Sep-25	Nil	Nil	3.2%	17.5%	34.0%	29.6%	12.7%	2.7%	0.3%	Nil	Nil
Oct-25	Nil	0.8%	6.6%	21.4%	33.0%	25.6%	10.4%	2.2%	0.2%	Nil	Nil
Dec-25	0.2%	2.0%	9.6%	23.8%	31.4%	22.5%	8.7%	1.8%	0.2%	Nil	Nil

(Data source: CME Fedwatch)

A quick reading of the CME Fedwatch post the inflation announcement tells you that the rate cut probabilities have not really changed much since they stabilized in a tighter range. However, the dovishness is gradually plateauing. Here is a quick summary.

• The minutes of the Fed meeting of September were announced during the week. The minutes showed that the verdict in favour of 50 bps rate cut may have looked decisive; but the underlying debate was a lot more fractured. In fact, Bowman may have been the only dissent vote, but many other members also preferred a 25 bps rate cut over a 50 bps rate cut. That goes to show that maintaining the pace of aggressive dovishness in upcoming meetings may not be that easy.
• US consumer inflation for September 2024 came in at 2.4%, which is 10 bps lower than the level seen in August. That is roughly in sync with the PCE inflation. However, the inflation story was more split. For instance, food inflation was up by 20 bps while the core inflation was up by 10 bps. The lower inflation was an outcome of energy inflation contracting by -6.8% in September, compared to -4.0% in August. However, with Brent Crude nearing $80/bbl, it is doubtful how much longer this advantage can last.
• In other data points, the Atlanta Fed GDP estimate of Q3-2024 GDP for the US economy came in at 3.2%, indicating that full year growth may end up well above the 2.5% mark. The crude oil inventories saw s sharp build-up of 5.810 Million barrels compared to estimates of a build-up of just 2.000 Million barrels. This is likely to keep oil prices under pressure in the global markets.

CME Fedwatch is getting less dovish as the growth appears to be a lot more robust and the inflation still looks vulnerable to a sudden spike. The CME Fedwatch is still pencilling 75 bps to 100 bps overall rate cut by end of 2024 and 175 bps to 200 bps overall by end of 2025. Let us now turn to the triggers for the coming week for the CME Fedwatch.

TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO OCTOBER 18, 2024

The coming week to October 18, 2024 will be dominated by the FOMC minutes and the announcement of the consumer inflation by the US.

• In key Fed speak in the coming week, Waller, Raphael Bostic, and Neil Kashkari are slated to speak at different forums. It would be interesting to see what Neil Kashkari says after the 50 bps rate cut. Neil Kashkari was initially a supporter of a more dovish policy but later took the side of the hawks and even spoke against any rate cuts in the year 2024. It would be interesting to check out what is his stand on the Fed action at this juncture. Most likely, he was either the neutral vote or ambivalent vote in the FOMC.
• The all-important consumer inflation expectations will be out this week. It must be remembered that consumer inflation expectations is based on what individuals experience and generally the expected consumer inflation tends to be higher than the level of CPI inflation reported by the US Bureau of Labour Statistics (BLS). In the last few weeks, this consumer inflation expectations have hovered around 3% and that is where it stays even now. That would be broadly in sync with 2.0% to 2.2% PCE inflation.
• In other data points to watch in the coming week; there would be focus on the EIA weekly crude inventories. That had come in at 5.810 Million barrels last week and is expected to taper this week with the rising crude prices. For the week, the initial jobless claims are also expected to taper from 258K to a more sober level of 241K. The index of industrial production will be out this week; and last month it just held in the positive.

Let us finally turn to the big story of how all these news flows added up to influence the CME Fedwatch probabilities in the latest week.

RATES TRAJECTORY – MORE UPFRONT, OR MORE BACK-ENDED?

The Fed has clearly opted for front loading of rate cuts and it wants to give a message that the central bank means business and can act decisively, either ways. However, some of the recent data flows are likely to put limits on the extent of dovishness of the Fed. For example, the second quarter final GDP and the recent jobs data are indicating that hard landing may not really be a concern for the US economy. Also, the Fed minutes suggest that, while the Fed cut rates by 50 bps, most FOMC members would have preferred a 25 bps rate cut. Even the recent consumer inflation data shows potential risks to inflation; with the strife in West Asia is getting worse. Rising oil prices have the potential to be inflationary.

Here is a quick look at how the rate cut probabilities panned out after all the recent key data points like the unemployment data, consumer inflation data, minutes of the Fed meeting etc were already factored into the CME Fedwatch. Here is what we read from the CME Fedwatch chart.

• With the September rate cut of 50 bps done for now, the focus shifts to November and December FOMC meets. The CME Fedwatch gives a probability of 89.5% to 25 bps rate cut in November 2024; with anything beyond that not on the radar.
• What about the first milestone of December 2024? By then, there is 84.4% probability of total 50 bps rate cut (100 bps in all). Also, there is a small probability of 15.6% for an overall 75 bps rate cut. So, it is most likely 100 bps from the peak and possibly just 75 bps of rate cuts overall by the end of December 2024.
• Let us turn to June 2025 milestone. The CME Fedwatch is assigning 93.8% probability for overall 150 bps rate cuts from the peak and 70.7% probability for 175 bps rate cut from the starting point of the cycle.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 89.3% probability for 175 bps of rate cuts from the peak and a high probability of 66.8% for 200 bps of rate cuts by December 2025. So, it looks very likely that the US Fed rate could settle at (3.25%-3.50%) by close of December 2025; although incoming data could likely restrict it to just 175 bps rate cut from the peak.

Will the Fed adhere to such an aggressive time table? To be fair, the Fed view and the CME Fedwatch vie are now almost in sync. That looks like a fair path ahead, unless inflation spikes sharply due to the oil price effect. Then the equations for the US Federal Reserve could change rapidly. An overall rate cut of 75-100 bps by end of 2024 and an overall rate cut of 175-200 bps by end of 2025 looks like a very plausible scenario!