Weekly Musings – CME Fedwatch change for week to March 01, 2024

4 Mar 2024 , 06:55 AM

GOVERNOR WALLER SEES NO RUSH TO CUT INTEREST RATERS

In deciding the course of the interest rates, the markets not only go by the Fed statement and the Fed minutes, but also by the speeches made by the Fed governors in between. During the week, the speech made by Governor Christopher Waller stood out, in that he almost question if there was a tearing hurry to cut interest rates in the US. His cryptic question, “What is the rush to cut interest rates” became the theme for the hawks. Here is why Waller is in no hurry to cut rates.

1. The second estimate of Q4 US GDP has been pegged at 3.2%, just about 10 bps below the first estimate. The moral of the story is that it still remains very robust and will still support full year US GDP growth of close to 2.5%-2.6%. According to Christopher Waller, with full year US GDP for 2023 likely at 2.5% or higher, it was clear that the hard landing risk had been substantially, if not entirely, avoided. In such a situation, Waller did not see any logic in cutting rates in a hurry, especially at a time when the GDP growth was already so robust. In addition, even the Q1 2024 Atlanta Fed GDP is above 3% now.

    

2. Secondly, Walker talks about the employment situation. Normally, there is a trigger to cut rates urgently when GDP growth is faltering or if unemployment is too high. We have seen the robust GDP story in the first point, so let us turn to the jobs story. In the latest report, the jobs grew by 353,000, well above the forecasts of below 200,000 levels. The rate of unemployment is at 3.7%. This is higher than the recent low of 3.4%, but still sharply lower than any of the economic growth periods in the past. This underlines the need to hold status quo on rates. After all, aggressive rate cuts at this juncture could only make the labour market tighter and exacerbate inflation.

    

3. Finally, let us turn to the inflation story. The PCE inflation for January 2024 was 20 bps lower at 2.4%, despite the consumer inflation coming in higher than expected. While PCE food inflation has seen some pressure, the PCE energy inflation and the PCE core inflation are clearly trending lower. However, Waller sees logic in first testing whether this fall is sustainable and whether the US economy can hold 2% inflation.

The gist of the story, as presented by Christopher Waller is that the Fed is in no hurry to cut interest rates, something that may surely disappoint the hawks tracking the CME Fedwatch.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED FEBRUARY 23, 2024

The FOMC minutes announced by the Fed was the big data point in the week to February 23, 2024. Most of the speeches made by Fed members, continued to be cautious and veered towards hawkishness. The trajectory of the US bond yields and the dollar index also did not reveal much. The CME Fedwatch has now reconciled to the reality of just about 75-100 bps of rate cuts in the current calendar year. For now, the only signal is that, rate cuts are off the table in March and the first rate cuts would only happen after June 2024. 

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Mar-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.0%	96.0%
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.9%	25.3%	73.8%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	0.5%	14.3%	52.0%	33.1%
Jul-24	Nil	Nil	Nil	Nil	Nil	0.3%	8.2%	35.4%	41.5%	14.7%
Sep-24	Nil	Nil	Nil	Nil	0.2%	5.7%	26.7%	39.5%	23.2%	4.7%
Nov-24	Nil	Nil	Nil	0.1%	2.9%	16.2%	33.1%	31.4%	14.0%	2.3%
Dec-24	Nil	Nil	0.1%	2.0%	11.7%	27.4%	32.0%	19.8%	6.2%	0.8%
Jan-25	Nil	Nil	1.2%	7.6%	20.8%	30.0%	25.0%	12.0%	3.1%	0.3%
Mar-25	Nil	0.5%	3.6%	12.5%	24.2%	28.1%	20.1%	8.7%	2.1%	0.2%
Apr-25	0.3%	2.4%	9.2%	19.9%	26.7%	23.1%	13.0%	4.5%	0.9%	0.1%

Data source: CME Fedwatch

There were 4 critical triggers in the week to February 23, 2024 for the CME Fedwatch, with the Fed minutes obviously being the most critical.

• The Federal Open Markets Committee (FOMC) minutes published during the week were ambivalent and non-committal on the timing of rate cuts. Fed still wants to see convincing evidence of inflation moving towards 2%. Now it looks like even May and June rate cuts look unlikely and the first rate cuts could only happen in H2-2024.

   

• The API (American Petroleum Institute) crude stocks were encouraging. The API crude stocks increased by 7.168 Million barrels; higher than the estimate of 4.298 Million barrels. This has kept the oil prices in the global market in a range.

   

• One quiet area of action is the Fed balance sheet. The Fed minutes had indicated that it would reduce the usage of the bond taper to ensure sufficient liquidity. However, this week has seen the Fed balance sheet shrinking further to $7.582 Trillion.

   

• During the week, there were critical speeches made by Fed governors, Raphael Bostic, Michelle Bowman, Chris Waller, and Neil Kashkari. The undertone in all these cases was one of caution on rate cuts.

It does look like the idea of cutting rates is not on the agenda of the Fed in the first half of 2024. Rate cut time table will only come after that.

CME FEDWATCH IN THE WEEK TO MARCH 01, 2024

The latest week to March 01, 2024 was all about the US GDP data (second estimates) for the fourth quarter and the all-important PCE inflation for January 2024. The table below captures the Fed Futures probabilities over the next 10 meetings of the Federal Open Markets Committee (FOMC) at the close of the week. The expectation is 75 bps rate cut by December 2024 and a total of 100 to 125 bps by April 2025; fully syncing with the Fed. 

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
Mar-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.0%	96.0%
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.6%	18.0%	81.4%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	0.3%	10.2%	52.8%	36.7%
Jul-24	Nil	Nil	Nil	Nil	Nil	0.2%	6.0%	34.8%	43.5%	15.5%
Sep-24	Nil	Nil	Nil	Nil	0.1%	4.4%	26.8%	41.1%	23.3%	4.3%
Nov-24	Nil	Nil	Nil	0.1%	2.4%	16.5%	34.5%	31.5%	13.1%	2.0%
Dec-24	Nil	Nil	Nil	1.6%	11.8%	28.4%	32.5%	19.2%	5.7%	0.7%
Jan-25	Nil	Nil	1.0%	7.5%	21.4%	30.8%	24.9%	11.4%	2.8%	0.3%
Mar-25	Nil	0.4%	3.6%	13.2%	25.2%	28.3%	19.3%	7.9%	1.8%	0.2%
Apr-25	0.3%	2.4%	9.6%	20.8%	27.2%	22.7%	12.1%	4.0%	0.8%	0.1%

Data source: CME Fedwatch

There were 4 critical triggers to watch out for in the coming week to March 01, 2024 with reference to CME Fedwatch. The big trigger will be the Fed minutes publication.

• The Q4 GDP second estimate came in 10 basis points lower at 3.2%, as compared to the first estimate. That still holds the promise of full year GDP for 2023 at above the 2.5% mark. Atlanta Fed GDP for Q1-2024 is expected to be robust at 3.2%.

   

• The US BEA also announced the PCE (private consumption expenditure) inflation in the week at 2.4%, a full 20 bps lower than the previous week. The PCE inflation is the critical input used by the Fed to take a call on rate action. The good news is that the PCE inflation for January, trended lower, against market expectations of a spike.

   

• The API crude oil stocks went up during the week from 7.168 Million barrels in the previous week to 8.428 Million barrels in the current week. This is likely to keep the global oil price subdued since US oil inventories have a profound impact on the global crude oil prices. That will also keep the energy inflation in check.

   

• The week also had its share of important views coming from the Fed governors like John Williams, Raphael Bostic, and Loretta Mester. The gist of the views was that there was no urgency to cut rates and the Fed could afford to do it in a more calibrated manner.

Let us turn to some of the key triggers for the CME Fedwatch in the coming week to March 08, 2024 and the key data points to watch out for.

TRIGGERS FOR CME FEDWATCH IN COMING WEEK TO MARCH 08, 2024

There are 3 critical triggers to watch out for in the coming week to March 08, 2024 with reference to CME Fedwatch.

• There is the all-important Fed testimony on February 06 and 07 in front of the Senate Banking Committee. In this testimony, under oath, Jerome Powell will testify on the half yearly monetary policy and update the Senate Banking Committee on the progress on inflation control as well as on the trajectory of future rate cuts.

   

• The Fed balance sheet will be in focus after it had tapered to $7.568 Trillion in the previous week. The Fed has hinted that it would go slow on Fed taper, but it seems to be continuing. It must be remembered that this balance sheet tapering has the impact of magnifying the hawkishness of the Fed.

   

• In terms of Fed speak this week, FOMC members Harker, vice chair Barr and Mary Daly are likely to give their view this week, apart from Powell’s testimony. Fed speak assumes added importance, especially after Christopher Waller had indicated last week that the Fed was in no hurry to cut the Fed rates and these cuts could be more calibrated.

Let us finally turn to how the CME Fedwatch has now full converged towards the Fed point of view.

CME FEDWATCH VS FED STANCE: FINALLY, IT IS CONVERGENCE

Last week, the CME Fedwatch further had cut its estimate of rate cuts from 100 bps in 2024 to just 75 bps in 2024. That view has been sustained in this week, although the probability distribution appears to be veering towards delayed rate cuts. As usual, the Fed takes its communication very seriously and it has detested a situation when the market tries to outguess its intent. For this week, there are 2 key takeaways in terms of the divergence / convergence between CME Fedwatch and the Fed stance.

• On the upside, there appears to be a consensus between the Fed and the CME Fedwatch on rates trajectory. The Fed has now almost committed that the rates may have peaked at 5.25%-5.50%. The Fed minutes have already averred that the probability of rate cuts was substantially higher than rate hikes. Apparently, additional rate hikes will only happen under very exceptional circumstances. The Federal Reserve will still prefer to hold rates higher for a longer period rather than hiking rates. The Fed and the CME Fedwatch are almost entirely in sync on the upside.

   

• Now, there is substantial sync on the downside too. The dichotomy was on the downside, but that had come down to zero in the previous week. The aggression of the CME Fedwatch had been toning down in recent weeks as the divergence was closing in. The Fed had originally committed to 3 rate cuts in 2024 and 4 rate cuts in 2025, without any time table for rate cuts. Now, the CME Fedwatch is also factoring in 75 bps rate cut by December 2024 and 100 bps to 125 bps by April 2025. In the limited visibility available to the CME Fedwatch, this looks like full convergence with the Fed viewpoint.

The Fed had affirmed, time and again, that It would stay data driven and even prefer to err on the side of caution. Fed has repeatedly underscored that the last mile inflation was the toughest to handle for policymakers. For now, the Fed stays ambivalent about the trajectory and the timing of rate cuts; but the two speeches of Governor Christopher Waller and Governor Lisa Cook last week, said it all. While Lisa Cook elaborated on the short term and long term uncertainties in the current context, Waller was more forthright about questioning whether there was any hurry to cut rates now. Clearly, the Fed can afford to wait; and it is biding its time.