Weekly Musings – CME Fedwatch change for week to April 12, 2024

14 Apr 2024 , 07:25 PM

FOMC MINUTES AS AMBIGUOUS AS EVER

The FOMC minutes had detailed discussions but could hardly go beyond agreeing to the fact that Fed action on rates had to be calibrated. Here is a gist of the Fed minutes, which had a deep impact on the CME Fedwatch during the week.

• One thing that emerged as the theme of the FOMC minutes was that the Federal Reserve officials remained deeply concerned that inflation was not moving lower quickly enough. In terms of intent, there was consensus that the Fed was open to cutting rates at some point later in 2024. However, the timing, pace and intensity remained as ambiguous as before, or perhaps even more.
• The minute clearly indicated that the last mile inflation control was proving to be a very tough job. In the last 2 months, the US consumer inflation had rallied by 40 bps and was now a full 150 basis points above the Fed target of 2%. That only means that the Fed would be doubly careful about venturing into rate cuts, lest it creates a situation that is not exactly reversible.
• The message from the FOMC minutes was that the Fed would not be cutting the benchmark rates till it gained greater confidence that inflation was on a steady path towards the Federal Reserve’s 2% annual target. The minutes also reiterated that the inflation as well as the GDP growth and labour were not in sync with a situation that would warrant any urgent rate cuts.
• The members of the FOMC were broadly divided on the issue of whether the spike in inflation in the last two months were driven by secular factor or by seasonal factors. The members were divided on this subject with forceful arguments coming from both the sides. The eventual consensus was that inflation was broad-based and hence could not be dismissed as a mere statistical aberration; which appears to be the right conclusion and that is likely to influence the road ahead for the Federal Reserve.
• While the intent of the Fed was controlling inflation without allowing unemployment to spike beyond a point, it was the plan of action that was more ambiguous. The FOMC is yet to be fully convinced that the time was ripe for rate cuts, especially considering the geopolitical situation and the worsening equations between Iran and Israel in West Asia. In fact, fuel inflation has been the big driver of US inflation in recent months.
• On the subject of balance sheet unwinding, the Fed minutes was relatively ambiguous. It must be remembered that the bond book has already been compressed by $1.70 Trillion. Latel, the Fed has hinted at going slow on bond unwinding, but that is not evident in the Fed action. In terms of action plan, the Fed restricted itself to saying that the process would start “fairly soon” without committing to specific timelines.

Not surprisingly, with sticky inflation evident in the CPI reading and the rather hawkish notes from FOMC members, including doves like Neil Kashkari, the sentiment is one of caution. Now the CME Fedwatch is pegging that the first rate cut would only happen in September 2024, with a much higher probability of 2 rate cuts in 2024. The minutes were silent on the timeline of rate cuts, but the CME Fedwatch has reasons to be less dovish than the Fed pronouncements. In a nutshell, the Fed remains utterly cautious.

RECAP – CME  FEDWATCH FOR THE WEEK ENDED APRIL 05, 2024

The week to April 05, 2024 was marked by the sharp upgrade to Q1 GDP estimates by the Atlanta Fed. To add to the data shout, even FOMC members like Christopher Waller and Michelle Bowman, suggested that the Fed hold on to rates for as long as required.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.8%	95.2%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	2.4%	50.8%	46.8%
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	1.0%	22.4%	49.1%	27.4%
Sep-24	Nil	Nil	Nil	Nil	Nil	0.7%	15.1%	40.1%	34.8%	9.3%
Nov-24	Nil	Nil	Nil	Nil	0.2%	5.6%	23.7%	38.3%	26.0%	6.1%
Dec-24	Nil	Nil	Nil	0.1%	3.8%	17.5%	33.2%	30.3%	13.0%	2.1%
Jan-25	Nil	Nil	0.1%	1.7%	9.5%	24.1%	32.0%	23.0%	8.4%	1.2%
Mar-25	Nil	Nil	0.9%	5.8%	17.2%	28.3%	27.2%	15.3%	4.6%	0.6%
Apr-25	Nil	0.4%	2.7%	10.1%	21.3%	27.9%	22.8%	11.3%	3.1%	0.4%
Jun-25	0.2%	1.5%	6.2%	15.5%	24.5%	25.4%	17.3%	7.4%	1.8%	0.2%

Data source: CME Fedwatch

There were 3 critical triggers for the CME Fedwatch in the week to April 05, 2024 with reference which had a strong influence on the rate outlook probabilities. Here is a quick recap of the major events of the week to April 05, 2024.

• The big news was the sharp upgrade in the Atlanta Fed estimates for Q1-2024 GDP growth. Till the previous week, it had hovered between 2.1% and 2.3%. In the latest week, the Atlanta Fed raised its estimate to 2.8%. That will make rate cuts tougher.
• Fed speeches by Cook and Bowman continued to reiterate on the need to be data driven. This is, even as Jerome Powell has been trying to assuage the markets with hope. That enthusiasm is not shared by other members of the FOMC. The opinion of the FOMC is that it is best to wait and watch till labour, growth and inflation stabilize in the US.
• API crude inventories were expected to fall by 2 Million barrels for the week, but instead ended up lower by 2.286 Million barrels. That has put pressure on oil prices as the US is seeing a drawdown on inventories as robust demand has outpaced rising output.

Let us turn to the major triggers influencing the CME Fedwatch in the just concluded week to April 12, 2024.

CUT TO THE PRESENT: CME FEDWATCH IN WEEK TO APRIL 12, 2024

The latest week to April 12, 2024 saw the CME Fedwatch veering towards just 2 rate cuts in 2024. The week was heavy on data flows. The table captures Fed Futures probabilities over next 10 FOMC meetings after the CPI inflation announcement and the FOMC minutes. The expectation is now of 2 rate cuts in 2024 and 3-4 rate cuts by June 2025.

Fed Meet	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550
May-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	5.9%	94.1%
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	1.4%	26.9%	71.7%
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	0.6%	11.4%	44.5%	43.5%
Sep-24	Nil	Nil	Nil	Nil	Nil	0.3%	5.6%	26.6%	44.0%	23.5%
Nov-24	Nil	Nil	Nil	Nil	0.1%	1.6%	11.0%	31.2%	38.7%	17.4%
Dec-24	Nil	Nil	Nil	Nil	0.8%	6.2%	20.9%	34.8%	28.3%	8.9%
Jan-25	Nil	Nil	Nil	0.3%	2.6%	11.1%	25.5%	32.7%	21.9%	5.9%
Mar-25	Nil	Nil	0.1%	1.3%	6.4%	17.6%	28.7%	27.8%	14.7%	3.3%
Apr-25	Nil	Nil	0.5%	2.8%	9.7%	20.8%	28.5%	24.0%	11.4%	2.3%
Jun-25	Nil	0.2%	1.6%	6.0%	14.8%	24.3%	26.4%	18.2%	7.2%	1.3%

Data source: CME Fedwatch

There were 4 critical data points in the week to April 12, 2024 with reference to CME Fedwatch.

• Consumer inflation set the tone for the week. The CPI inflation for March came in 30 bps higher at 3.5%, 10 bps higher than street expectation. Now, US inflation is a full 150 bps away from the 2% target. It is once again a problem with the last mile, but the obvious inference is that rate cuts are going to be off the agenda for now.
• FOMC minutes of the March Fed meeting were published in the week. The only story that emerged from the minutes was that Fed continues to remain ambiguous about the timing and pace of the rate cuts. However, now even the markets are veering towards rate cuts commencing only in September 2024.
• Oil continued to hover around $90/bbl, but the real indication of rate cuts being delayed came from the dollar index (DXY) jumping from 104 to 106 levels in a single week. It is not just short of the recent peak of 107, showing that rate cuts could be back-ended, if the current macroeconomic situation continues.
• FOMC member, Neil Kashkari spoke during the week and was uncharacteristically hawkish, even suggesting that Fed may not cut rates in 2024 at all. That did lead to a sharp sell-off since Kashkari is a known dove, considering his Goldman background.

Let us turn to how the CME Fedwatch is likely to be influenced by the flow of data in the forthcoming week.

TRIGGERS FOR CME FEDWATCH: NEXT WEEK TO APRIL 19, 2024

There are 3 critical triggers to watch out for in the coming week to April 19, 2024 with reference to CME Fedwatch.

• The major data point this week will be the API crude weekly inventories report. Last week, the API inventories increased by 3.034 Million barrels. That is a good sign amidst the worsening tensions in the Middle East and West Asia. This week is again expected to see a spike in oil inventories, helping to subdue prices below the $90/bbl mark.
• There are several influential voices to speak in this week. These include FOMC chief, Jerome Powell and other FOMC members like John Williams, Michelle Bowman, and Raphael Bostic. The market will look for clues on the timing and likelihood of rate cuts, which now looks more likely in the second half of the calendar year only.
• The one thing that will be closely tracked in the week will be the US dollar index. Last week, the dollar index rallied sharply to 106 levels. In its entire history, the Dollar Index has crossed past 107 levels only thrice. Hence, the DXY is at a crucial level, and it could have very important repercussions for global currencies.

Let us finally turn to how the CME Fedwatch has not only converged with the Fed viewpoint, but has also become more hawkish than the Fed statements.

CME FEDWATCH NOW EXPECTS JUST 2 RATE CUTS IN 2024

The last 3 weeks have been an absolute see-saw. In recent weeks, the PCE inflation, CPI inflation and the robust GDP numbers have all pointed to the likelihood that rate cuts could be delayed. It is not yet clear when the rate cuts will start, but markets are guessing that rate cuts could start only around September 2024. The elevated inflation data, rising inflation risks from the Middle East and the patently hawkish noises coming from the FOMC members have had a deep impact on the Fed rate cut probabilities.

• Let us first look at the probabilities on the upside. There appears to be a virtual consensus between the Fed and the CME Fedwatch that rates have peaked in the range of 5.25%-5.50%. That is something CME Fedwatch has been hinting for some time and now even Fed statements appear to concur with this view. However, in this week, an avowed dove like Neil Kashkari hinted that the Fed was also open to rate hikes, should the inflation continue to play truant with the US economy.
• On the downside, CME Fedwatch has not only aligned itself with the Fed viewpoint, but the CME Fedwatch is starting to look more hawkish than the Fed statement indications. The CME Fedwatch became more hawkish after the CPI inflation data and FOMC minutes in this week. Now, the CME Fedwatch is pencilling in a 70% probability that there would only be 2 rate cuts in 2024, with 3 rate cuts reduced to a 30% probability. In fact, the CME Fedwatch is almost assigning a probability of 45% that the Fed rates will not move an inch till July. The longer term projections are likely to be less credible, especially if you consider the fluid macroeconomic situation.

What did we decipher from the language of the Fed and the subtle shifts in the rate cut probabilities assigned by the CME Fedwatch? Fed has already emphasized that last mile inflation could be tough; and that does appear to be the case. In retrospect, the Fed chair may have jumped the gun in assuring 3 rate cuts in 2024; which looks increasingly remote at this juncture. Clearly, the FOMC members are in no rush to cut rates. The markets are also gradually reconciling to the new reality.