Weekly Musings – CME Fedwatch for week to September 06, 2024

9 Sep 2024 , 01:35 PM

US JOBS DATA ALONG EXPECTED LINES

It is just a month since the sharp deterioration in the employment data for July had triggered a massive global sell-off in early August. What started as a bout of selling in the US markets, gradually spread across the global markets. In comparison, the markets were much better prepared for the August US employment numbers, which were put out on Friday. Let us start with a quick look at the July data announced last month. The jobs report had pegged non-farm payrolls addition at just 1,14,000 workers. This was rather disconcerting as the average non-farm payroll addition in 2023 was above 2 Lakhs. That was not all. The July unemployment figure had come in sharply higher at 4.3%, from a low of 3.4% in the early part of 2023.

In comparison, the August jobs data announced on September 06, 2024 was largely along expected lines. The August unemployment rate is marginally better by 10 bps at 4.2%, but most of the numbers are almost flat in absolute terms. It may still be too early to talk about hard landing, but the risks to sustained growth are definitely there. Analysts are of the view that the Fed, in its enthusiasm to restore balance in labour markets, may have just gone too far. One distinct now is that the rate cuts could be more aggressive from September 2024. This jobs data is a key input point for the Fed ahead of its September 18, 2024 FOMC meet.

AUGUST JOBS DATA STILL HAS SOME GROWTH CONCERNS

The quick take on the labour data is that it has not aggravated compared to the July reading. For instance, the non-farm payrolls addition of 1,42,000 was better than the previous month addition of 1,14,000. But that is not the full story. Based on additional data flows; the change in nonfarm payroll employment for June was revised down from +179,000 to +118,000; while the figure for July 2024 was also revised lower from +114,000 to +89,000. That is substantial downward revision and could have its impact on the August data too; which means the final August non-farm payroll additions may be much less than 142K.
Despite the 10 bps fall in unemployment, the data points to a sense of urgency in rate cuts when the Fed meets in September. Absolute numbers, in most cases, are same as July. However, the unemployment rate still remains sharply higher than last year by 70-100 bps on an average. In the US, 3.5% unemployment is defined as full employment and currently, it is a 70-80 bps higher. Even the view on jobs from the perspective of the Household Survey and the Establishment survey; show that July and August data are largely similar.

RECAP – CME FEDWATCH FOR THE WEEK ENDED AUGUST 30, 2024

Let us start with a recap of the week to August 30, 2024; and how the CME Fedwatch panned out during the week. By the week to August 30, 2024, the markets had more or less crystallized that the first rate cut would happen by September 2024 and also assigned a high probability of 3-4 rate cuts happening in 2024. Here are CME Fedwatch probabilities.

Fed Meet	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	30.0%	70.0%
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	8.9%	41.8%	49.3%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	3.5%	21.8%	44.8%	30.0%	Nil	Nil
Jan-25	Nil	Nil	Nil	0.4%	5.5%	24.4%	43.1%	26.6%	Nil	Nil	Nil
Mar-25	Nil	Nil	0.9%	7.4%	26.2%	41.5%	23.9%	Nil	Nil	Nil	Nil
May-25	Nil	0.6%	5.5%	20.6%	36.9%	29.1%	7.1%	Nil	Nil	Nil	Nil
Jun-25	0.4%	3.8%	15.2%	31.1%	31.9%	15.0%	2.5%	Nil	Nil	Nil	Nil
Jul-25	2.1%	8.7%	22.1%	31.5%	24.6%	9.6%	1.4%	Nil	Nil	Nil	Nil
Sep-25	5.1%	13.4%	25.4%	29.1%	19.4%	6.8%	0.9%	Nil	Nil	Nil	Nil
Oct-25	8.2%	16.2%	26.2%	26.8%	16.4%	5.4%	0.7%	Nil	Nil	Nil	Nil
Dec-25	12.1%	18.6%	26.4%	24.4%	13.8%	4.3%	0.6%	Nil	Nil	Nil	Nil

Data source: CME Fedwatch
The week to August 30 had 3 key data points that could have a substantial and meaningful impact on the CME Fedwatch probabilities.

• The second estimate of Q2 GDP was published on Thursday by the US Bureau of Economic Analysis (BEA). The Q2 GDP growth estimate got upped by 20 bps to 3.0% in the second estimate, compared to 2.8% in the first advance estimates. This must be seen in perspective of Q3-2023 GDP growth at 4.9%, Q4-2023 GDP growth at 3.4%, and Q1-2024 GDP growth at 1.4%. The sharp bounce in Q2 and the subsequent upgrade should quell doubts over the growth story. The higher GDP growth in Q2 was triggered by higher nominal GDP growth and lower inflation impact.
• PCE inflation for the month of July 2024 was steady at 2.5%. More importantly, the PCE inflation for the last nine months now averages 2.58%. That should answer all the sceptics about whether low inflation is sustainable in the long run. While core inflation and food inflation were flat, the energy inflation tapered by 10 bps in July 2024. PCE inflation is more reliable as it look at the consumer side and also includes more data points as it is announced towards the end of the month.
• The third trigger was on oil inventories and the jobs data. The crude oil inventories put out by the EIA had seen drawdown of (4.649) Million barrels last week. This week, the drawdown was expected at (2.700) Million barrels, but the actual figure was more sober at (0.846) Million Barrels. However, crude prices have fallen quite sharply in the last few weeks; which is positive for energy inflation. Jobless claims were marginally lower than expectations at 231K; so essentially there are no immediate inflation concerns in the US.

Let us cut to the present; and look at the triggers for CME Fedwatch in the latest week to September 06, 2024.

CUT TO PRESENT: CME FEDWATCH IN WEEK TO SEPTEMBER 06, 2024

The latest week to September 06, 2024 saw the CME Fedwatch continue to factor in 3-4 rate cuts in 2024, but also suggested up to 8-9 rate cuts by December 2025.

Fed Meet	250-275#	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525
Sep-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	30.0%	70.0%
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	17.6%	53.5%	28.9%	Nil
Dec-24	Nil	Nil	Nil	Nil	Nil	12.3%	42.7%	36.3%	8.7%	Nil	Nil
Jan-25	Nil	Nil	Nil	5.6%	26.1%	39.8%	23.8%	4.8%	Nil	Nil	Nil
Mar-25	Nil	1.8%	12.2%	30.5%	34.7%	17.7%	3.2%	Nil	Nil	Nil	Nil
May-25	1.7%	11.8%	29.8%	34.5%	18.3%	3.8%	0.1%	Nil	Nil	Nil	Nil
Jun-25	9.3%	23.4%	32.8%	24.1%	9.0%	1.4%	Nil	Nil	Nil	Nil	Nil
Jul-25	19.9%	27.7%	28.9%	17.2%	5.5%	0.8%	Nil	Nil	Nil	Nil	Nil
Sep-25	28.9%	28.0%	25.1%	13.4%	4.0%	0.5%	Nil	Nil	Nil	Nil	Nil
Oct-25	35.5%	27.4%	22.3%	11.2%	3.2%	0.4%	Nil	Nil	Nil	Nil	Nil
Dec-25	38.7%	26.8%	21.0%	10.3%	2.9%	0.4%	Nil	Nil	Nil	Nil	Nil

Data source: CME Fedwatch (# – lower probabilities consolidated)

• The big data point in the week was the jobs report published by the Bureau of Labour Statistics (BLS) on September 06, 2024. As expected, the unemployment rate came down by 10 bps to 4.2%, but remained static in absolute terms. The non-farm payroll additions came in at 142K, but downgrades are likely. It opens up the gates to a near-certain 25 bps rate cut on September 18, 2024 and possibly 50 bps of rate cut.
• In an interesting and significant speech, FOMC member, Christopher Waller hinted that the time was ripe for aggressive rate cuts. In fact, Waller had suggested front loading rate hikes in 2021 and now suggests front loading the rate cuts. According to Waller, not only is the time ripe for a rate cut, but the time is also ripe to shift focus from inflation control to supporting growth. Rate cuts need to be substantive, according to Waller.
• Among other key data points in the week, the Atlanta Fed GDP came in sharply lower at 2.0% for Q3, compared to the estimate of 2.5%. Also, there was a sharp drawdown in crude inventories. The markets were expecting drawdown of (0.600) Million barrels, but the actual drawdown was sharply higher at (6.873) Million barrels. However, the week also saw a sharp fall in crude prices after the Citi report, cutting target to $60/bbl.

Let us now turn to the big triggers for the CME Fedwatch in the upcoming week and how the triggers could play out.
TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO SEPTEMBER 13, 2024
The next week has limited data flows, so the dominant data point will be the consumer inflation for August 2024. There are 3 key data points to look out for.

• The US CPI inflation will be announced on September 11, 2024. The consensus expectation is that the headline consumer inflation will see a sharp fall of 30 bps from 2.9% to 2.6%. That will be the perfect setting for the Fed to commence rate cuts when the FOMC meets up and puts out the monetary statement on September 18, 2024.
• The consumer inflation expectations and the Atlanta Fed GDP estimates will be out in the coming week on Monday. While the consumer inflation is pegged lower, it is the Atlanta Fed GDP that is a real concern. In the last one week, the estimate for Q3 GDP growth has been sharply downsized from 2.5% to 2.1% on an average. That will be the key to check if a hard landing is still possible.
• A lot will depend on the EIA oil inventory moves. Last week, the drawdown of oil inventories in the US were sharply higher at (6.873) Million barrels. However, with the crude oil price at $71/bbl, the US may use some of this price advantage to accumulate more to its crude reserves as a measure of long term security.

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

RATES TRAJECTORY – FED MAY FRONT-LOAD RATE CUTS

Over the last few weeks, it has been amply clear that the Fed will trigger off rate cuts in its September 18, 2024 monetary policy statement. However, there is still a debate over whether it would be a calibrated move or an aggressive front loaded move. The latest unemployment data for August suggests that the unemployment level may be stuck at a structurally higher level. That goes against the original preamble of the Fed; which is to maintain price stability and near full employment (3.5% unemployment). This means that rate cuts could be front-loaded by the Fed instead of being too calibrated.

The first signs of the Fed front-loading rate cuts was visible in the speech delivered by Christopher Waller at the University of Notre Dame, Indiana. For the first time, Waller hinted that the time was ripe for rate cuts and he also implied that just as he had supported front-loading rate hikes in late 2021, today he was all for front-loading rate cuts. According to Waller, instead of being too cautious and paranoid about inflation, the bigger priority now would be to ensure that the economy does not end up in a hard landing. The labour data and the frequent negative yield spreads were early indications and it was the right time to take cognizance of such signals.

Here is what the CME Fedwatch table above is indicating in terms of the probability of rate cuts in the next 16 months.

• The CME Fedwatch has assigned a high probability of 70.0% to a 50 bps rate cut in the September meeting; while 25 bps rate cuts is already taken as fait accompli. However, it is the projections beyond September that are already hinting at front-loading.
• The CME Fedwatch assigned a probability of 100.0% to 50 bps rate cuts and 71.1% probability to 75 bps rate cut by November 2024. A 75 bps rate cut by November would, most likely, entail a 50 bps rate cut on September 18, 2024.
• Let us look at the first milestone of December 2024. By then, a 75 bps rate cut is almost a certainty. Also, there is a probability of 91.3% for a 100 bps rate cut. So, it could very well be 50 bps in September 2024 and another 50 bps by December 2024.
• Probabilities beyond 2024 are still evolving and will offer more clarity once the current year action is visible. Let us look at June 2025. The CME Fedwatch is assigning 98.6% probability for 175 bps rate cuts and 89.6% chance for 200 bps rate cuts by June 2025.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 96.7% probability for 200 bps of rate cuts and a high probability of 86.4% for 225 bps of rate cuts by December 2025. There is a 66% probability that the Fed could close year 2025 having cut rates by a full 250 bps from current levels (2.75%-3.00%).

Like in the past, the FOMC has been categorical that it would chart its own path on rate cuts. However, the recent speech by Christopher Waller and the incoming macro data appears to indicate that there could be a sense of urgency in the FOMC this time to front-load the rate cuts. How aggressively and how quickly the Fed cuts rates, would still be a matter of deliberation. The first signs of the Fed intent will be available on September 18, 2024; when Jerome Powell announces the Fed policy statement.