Weekly Musings – CME Fedwatch for week to October 25, 2024

28 Oct 2024 , 10:07 AM

SHOULD THE WORLD GET USED TO LOWER GROWTH RATES?

The World Economic Outlook report for October 2024 was recently put out by the IMF. This report is updated every 6 months by the IMF. In its October 2024 update, the IMF has raised a very relevant question; should the world get used to lower rates of growth. Based on a quick look at the data on growth and inflation post the pandemic, that would be the logical inference. This debate has come for two reasons. Firstly, the argument presented by the IMF in its report is that the scope for radical and structural reforms at the current juncture is quite low. Most economies already have enough on their plate to manage the post-COVID recovery, to worry about structural reforms. That is something that could have brought about quantum leaps in GDP. Also, neutral monetary policy appears to be the name of the game for most economies going ahead. That would mean; most economies are likely to grow their GDP at rates that are lower than the pre-pandemic rates of real GDP growth.

Here is a quick look at some of the triggers for lower growth going ahead.

• First and foremost, there is the demographic reality of an aging population, and this is a global phenomenon with Europe, Japan and even China likely to be afflicted by this problem. For India, the demographic dividends may last for another 15 years; not beyond that.
• In the last few years, much of the growth in GDP and the growth in inflation can be attributed to the services sector. However, for any economy, a strong manufacturing base still holds the key. It is this manufacturing base that is likely to be hampered by weak investments, low factor productivity growth, and rising interest rates. As a result, the real GDP growth in the world economy is pegged at 3.1% over next 5 years.
• Even the growth story within the advanced economies is likely to be largely disparate. For instance, the US and UK are likely to sustain GDP growth at above the pre-pandemic averages. However, among the advanced economies, the Euro Zone is likely to face pressure on growth while Japan is likely to continue with its sub-par growth story.
• As per the IMF report, situation has not changed much for the emerging economies. The medium-term growth prospects continue to be debatable and also vulnerable to shocks. More so, since the shocks of the last few years has taken its toll on most EMs. Latin American has its own set of commodity related problems. The story of India and China may not be too different. The India post-pandemic growth surge may have plateaued and is likely to taper gradually. China, has to first address its real estate mess and then address its growth slowdown.

In short, the road ahead is going to be tough for most of the world economies; with the best case examples like India and the US also seeing plateauing of GDP growth.

RECAP – CME  FEDWATCH FOR PREVIOUS WEEK ENDED OCTOBER 18, 2024

Let us start with a recap of the earlier week to October 18, 2024; and how the CME Fedwatch panned out during the week. Macros have been largely stable, and that has helped Fedwatch to find equilibrium around median expectations.

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	0.6%	99.4%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.5%	75.6%	23.9%	Nil
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	0.4%	57.5%	36.4%	5.8%	Nil
Mar-25	Nil	Nil	Nil	Nil	Nil	0.3%	52.4%	38.3%	8.5%	0.5%	Nil
May-25	Nil	Nil	Nil	Nil	0.2%	34.1%	43.2%	19.0%	3.3%	0.2%	Nil
Jun-25	Nil	Nil	Nil	0.2%	24.9%	40.7%	25.5%	7.6%	1.0%	Nil	Nil
Jul-25	Nil	Nil	0.1%	9.9%	31.1%	34.8%	18.5%	5.0%	0.6%	Nil	Nil
Sep-25	Nil	Nil	3.7%	17.7%	32.5%	28.8%	13.5%	3.4%	0.4%	Nil	Nil
Oct-25	Nil	0.8%	6.5%	20.7%	31.7%	25.7%	11.5%	2.8%	0.3%	Nil	Nil
Dec-25	0.2%	1.9%	9.4%	23.0%	30.5%	22.8%	9.7%	2.3%	0.3%	Nil	Nil

Data source: CME Fedwatch

The previous week to October 18, 2024 had limited event flows and it was more about routine data flows during the week.

• In key Fed speak, Christopher Waller, Raphael Bostic, and Neil Kashkari spoke during the week at different forums. Neil Kashkari, once again, has underlined that the rate cuts would continue, but it would be more calibrated in future. Christopher Waller of the Fed also suggested that the Fed is prepared with a Plan-B sudden data shocks. However, he expected 2% inflation and full employment objectives to be in balance. That also means; rate cuts would be carefully calibrated.
• Consumer inflation expectations at 3%, is at par with previous weeks. That is broadly in sync with the target of moving PCE inflation towards 2%. The other big data point was the initial jobless claims falling from 260K to 241K week-on-week. This underlines that the 4.3% unemployment reading in July 2024 may have been an aberration and sub-4% unemployment was the more likely paradigm.
• Normally, the EIA stocks had a strong influence on the oil price trajectory, but that has changed in the last few weeks as the price of crude has been determined more by demand concerns on one side and the geopolitical risks on the other. The expected accretion was +1.800 Million barrels during the week, but when the actual numbers were announced, there was a drawdown of -2.191 Million barrels. However, OPEC monthly report projected a sharp fall in Chinese oil demand, which led to Brent Crude cracking from $79/bbl to $73/bbl by the close of the week.

One trend we can decipher from the CME Fedwatch is that; it is getting less dovish as growth appears more robust than expected while inflation still looks vulnerable to geopolitical risks. CME Fedwatch is pencilling 75 bps to 100 bps overall rate cut by end of 2024 and 175 bps to 200 bps overall by end of 2025.

CUT TO PRESENT: CME FEDWATCH IN WEEK TO OCTOBER 25, 2024

The latest week to October 25, 2024 saw the CME Fedwatch continue to factor 3-4 rate cuts in 2024, and 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	95.1%	4.9%
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	74.6%	24.3%	1.1%
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	51.1%	40.2%	8.4%	0.3%
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	38.8%	42.8%	16.0%	2.3%	0.1%
May-25	Nil	Nil	Nil	Nil	Nil	21.0%	41.0%	28.3%	8.6%	1.1%	Nil
Jun-25	Nil	Nil	Nil	Nil	11.5%	32.0%	34.0%	17.5%	4.5%	0.5%	Nil
Jul-25	Nil	Nil	Nil	3.6%	17.9%	32.6%	28.9%	13.5%	3.2%	0.4%	Nil
Sep-25	Nil	Nil	1.2%	8.5%	23.0%	31.3%	23.6%	9.9%	2.2%	0.2%	Nil
Oct-25	Nil	0.3%	2.8%	11.6%	24.8%	29.7%	20.6%	8.3%	1.8%	0.2%	Nil
Dec-25	Nil	0.7%	4.4%	13.9%	25.6%	28.1%	18.4%	7.1%	1.5%	0.2%	Nil

(Data source: CME Fedwatch)

The week to October 25, 2024 was dominated by the FOMC minutes and the announcement of the consumer inflation by the US.

• In key Fed speak in the coming week, Michelle Bowman, Neil Kashkari, Mary Daly, and Patrick Harker addressed various forums. The gist of the Fed speak continues to be that the Fed would be open to adjusting rates, but possibly not as optimistically dovish as the CME Fedwatch appears to suggest. The one area where there is consensus is that the FOMC appears to have done a good job in containing inflation without allowing the growth story to get disrupted.
• The S&P Global Composite PMI for October was also announced in the week. Both, the manufacturing PMI, and the Services PMI were almost flat to positive leading to the compositive PMI edging up from 54.0 to 54.3 (showing positive macro momentum). Initial jobless claims are expected to edge up in the week from 242K to 243K, but once again it surprised the street with just 227K initial jobless claims. It shows that the 4.3% unemployment in July may be just a temporary aberration.
• In other data points to watch in the coming week; the Atlanta Fed GDP for Q3 came in about 10 bps lower at 3.3%; but still hinting at robust growth in 2024. The first advance estimate of Q3GDP growth for the US economy will be out in the last week of this month. That data, along with PCE inflation and October jobs data will set the tone for the upcoming FOMC meet, scheduled on November 07, 2024.

CME Fedwatch is getting less dovish as the growth appears to be more robust that expected while the inflation looks vulnerable to supply side shocks or even a demand shock. 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.

TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO NOVEMBER 01, 2024

The coming week to November 01, 2024 will be dominated by the September PCE inflation and the first advance estimates for Q3 GDP growth in the US.

• On Wednesday, the first advance estimate of GDP growth for the third quarter Q3-2024 will be put out by the US Bureau of Economic Analysis (BEA). The street expectation is that the GDP estimate would be at par with the previous quarter at 3%. Of course, this would be subject to second and third revisions towards the end of November and December respectively. However, if one goes by the Atlanta Fed GDP estimates, one can rule out a marginal upgrade to these growth estimates.
• The other important data point this week will be September PCE inflation, which is expected at the previous estimate of 2.2% in August. However, we could see pressure on core PCE inflation, which is already at 2.7% in the previous month. The PCE inflation is the key input that goes into the Fed decision on rates. For now, the GDP growth and the PCE inflation are giving contrasting signals about the likely trajectory of interest rates in the US economy in the coming one year.
• In other key data points in the coming week, the Initial jobless claims are expected to go up in the week from 227K to 231K, but that would still be sharply lower than the previous week when it was consistently above the 240K mark. That clearly paints a more benign picture of the unemployment issue in the US. In addition, the US Bureau of Labour Statistics (BLS) is also expected to announce the unemployment figure for October on November 01, 2024. As of now, the Bloomberg consensus estimates, peg the unemployment rate flat at 4.1%.

Let us finally turn to the big story of how all these past and future triggers have influenced the CME Fedwatch probabilities.

RATES TRAJECTORY – LESS CONFIDENCE ON AGGRESSIVE RATE CUTS

In its last FOMC meeting on September 18, 2024, the Fed had opted to front-load rate cuts by starting off the process with a 50 bps rate cut. Even as there was almost a consensus on the need to cut rates, there appeared to be clear differences on the extent of rate cuts. While Fed Governor, Michelle Bowman, dissented to the 50 bps rate cut; several other members were equally unsure but less forthright. That dichotomy came out clearly in the reading of the minutes of the September FOMC meet.

However, some of the recent data flows are likely to put some constraints on the extent of dovishness that the Fed can display. For example, the second quarter final GDP and the recent jobs data are indicating that hard landing may be off the agenda for now. The GDP growth has shown a revival after the shock in Q1 and inflation could get worse if the geopolitical risks in the Middle East and West Asia recede soon. Also, the unemployment rate has tapered from 4.3% to 4.1% in last 2 months even as jobless claims fell sharply.

Here is a quick look at how the rate cut probabilities panned out after the recent data points like unemployment data, consumer inflation, minutes of the Fed meeting, Fed Speak etc were factored into the CME Fedwatch. Here is our reading of 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 has assigned a probability of 95.1% to 25 bps rate cut in November 2024; with anything beyond that not on the radar. There is a 4.9% probability of status quo.
• What about the first milestone of December 2024? By then, there is 74.6% probability of additional 50 bps rate cut (100 bps in all). Also, there is a probability of 25.4% for an overall 75 bps rate cut only; a view that has gained credence in recent weeks. It looks like 100 bps overall in 2024 is highly likely, but the markets need not be surprised if the Fed decides to stop at just 75 bps overall for calendar year 2024.
• Let us turn to June 2025 milestone. The CME Fedwatch is assigning a 95% probability for a 125 bps rate cut by June 2024; a 77.5% probability for overall 150 bps rate cuts from the peak. The probability of a 175 bps rate cuts has reduced in the last one week from 65.8% to just 43.5%. That is reflective of the broad trend in the CME Fedwatch.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 72.8% probability for 175 bps of rate cuts from the peak and a high probability of 44.6% 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 possibly restrict it to just 175 bps rate cut from the peak. That decision would be incumbent on incoming jobs, inflation, and growth data.

Is the Fed likely to tone down its aggressive rate cut timetable? In a sense, the Fed view and the CME Fedwatch view are now largely in sync. Also, if you go by the recent speeches of Kashkari and Waller, the Fed would be open to a more calibrated and gradual reduction in rates. The most likely quantum of rate cuts (from the peak) is to the tune of 75-100 bps by end of 2024 and 175-200 bps by end of 2025. That should be beneficial overall!