The Market Now Believes in a Much Tougher Fed Until November

May 22, 2023

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12:24 am

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Data from CME Fedwatch, calculations by Mish.

According to CME Fedwatch, the single most likely action by the Fed is a pause all the way until a rate cut at the November meeting. But the path isn’t necessarily a flat one.

Odds of 5.00 Percent to 5.25 Percent

June 14: 81.5%
July 23: 80.6%
September 23: 55.9%
November 1: 20.9%

Across the board, the market has penciled in a much tougher Fed than immediately following the last FOMC meeting.

The lead chart shows the weighted average of market bets. The market has penciled in a rate hike in July then a cut in September.

Nonetheless, the market still anticipates an aggressive path of rate cuts starting in November and continuing in 2024.

What About the Debt Ceiling and Possible Default?

For now, the market seems little concerned about the possibility of a default. Neither am I.

For discussion, please see Biden Accuses Republicans of Extreme and Unacceptable Positions as Budget Optimism Fades

This post originated at MishTalk.Com

Addendum

Minutes after I finished the post, the market took back odds of a hike in July.

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FromBrussels2

2 years ago

Interest rates going down ? ! Not anytime soon ! More and more printing to keep up with utterly insane debt within a dedollarisation environment . ZIMBABWE here we come to join you ….and let s tango Argentina, with 100% rates ! Interest rates cuts ? My behind !

Lisa_Hooker

2 years ago

I have a new mental picture of the Fed.

It is of a group of blindfolded directors wildly waving colourful piñata sticks in the air at a piñata they believe is somewhere above their heads.

I find this somewhat depressing.

Salmo Trutta

2 years ago

re: ” as income velocity that cannot but impress anyone who works extensively with monetary data” (Friedman, 1956, p. 21).

Or (WSJ, Sept. 1, 1983) Friedman bastardized the equation of exchange that he had printed on his car license plate.

Zardoz

2 years ago

Nov 2029?

babelthuap

2 years ago

What happened to at least giving us futile protocols like sheltering in place under desks…meh. I will however give them credit for the futile recommendation of buying CD’s. The interest doesn’t keep up with inflation and isn’t insured but it makes people feel a little better I guess. I’m not knocking anyone who takes that course of action either, not for me but I get it. I bought some land and planning a large fall garden. I just wish I would have read the finer points of the deed restrictions. Garden is fine, also horses but no chickens which I think is due to noise but I doubt the neighbors would mind if If they got free eggs when they go up to $17 a dozen.

KidHorn

2 years ago

Reply to babelthuap

Eggs are now dirt cheap. The cheapest in years. Might be cheaper to buy eggs instead of feeding the chickens.

babelthuap

2 years ago

Reply to KidHorn

That’s short term thinking. As my high dollar investment banker friend says, when things are good they are bad and when they are bad they are good for him. A lot of work upkeeping a small farm in good times. Bad times it pays for itself and some.

Lisa_Hooker

2 years ago

Reply to babelthuap

I suppose they won’t let you keep a few goats?

Avery

2 years ago

No surprise. That’s what Powell told the fake Zyy on the recorded phone call.

Salmo Trutta

2 years ago

Atlanta gDpNow’s latest R-gDp estimate: 2.9 percent — May 17, 2023

There’s just too much money in the economy. But there’s a steady deceleration in long-term money flows (proxy for inflation).

01/1/2023 ,,,,, 0.499

02/1/2023 ,,,,, 0.429

03/1/2023 ,,,,, 0.353

04/1/2023 ,,,,, 0.339

05/1/2023 ,,,,, 0.295

06/1/2023 ,,,,, 0.234

07/1/2023 ,,,,, 0.211

08/1/2023 ,,,,, 0.206

09/1/2023 ,,,,, 0.215

10/1/2023 ,,,,, 0.197

11/1/2023 ,,,,, 0.195

12/1/2023 ,,,,, 0.166

The deceleration is likely to be faster because I plugged in a steady increase in money.

Jack

2 years ago

Reply to Salmo Trutta

Which money flow?

Interesting data, however you present only 5 real data points here.

I would like to review money flows prior to 2023 (i.e., more data points)

Salmo Trutta

2 years ago

Reply to Jack

01/1/2020 ,,,,, 0.049

02/1/2020 ,,,,, 0.087

03/1/2020 ,,,,, 0.205

04/1/2020 ,,,,, 0.360

05/1/2020 ,,,,, 0.452

06/1/2020 ,,,,, 0.519

07/1/2020 ,,,,, 0.530

08/1/2020 ,,,,, 0.544

09/1/2020 ,,,,, 0.643

10/1/2020 ,,,,, 0.641

11/1/2020 ,,,,, 0.912

12/1/2020 ,,,,, 1.184

01/1/2021 ,,,,, 1.271

02/1/2021 ,,,,, 1.427

03/1/2021 ,,,,, 1.572

04/1/2021 ,,,,, 1.562

05/1/2021 ,,,,, 1.712

06/1/2021 ,,,,, 1.796

07/1/2021 ,,,,, 1.836

08/1/2021 ,,,,, 1.914

09/1/2021 ,,,,, 1.897

10/1/2021 ,,,,, 1.902

11/1/2021 ,,,,, 1.940

12/1/2021 ,,,,, 1.889

01/1/2022 ,,,,, 1.993

02/1/2022 ,,,,, 2.005

03/1/2022 ,,,,, 1.639

04/1/2022 ,,,,, 1.384

05/1/2022 ,,,,, 1.317 *

06/1/2022 ,,,,, 1.226

07/1/2022 ,,,,, 1.188

08/1/2022 ,,,,, 1.269

09/1/2022 ,,,,, 1.131

10/1/2022 ,,,,, 1.086

11/1/2022 ,,,,, 0.840

12/1/2022 ,,,,, 0.525

This time series underweights Vt. Typically, when you increase M, it is followed by a 3 month * increase in Vt.

Jack

2 years ago

Reply to Salmo Trutta

The factor remains much higher than before COVID. Shows just how much money still sloshing around.

Appears may still take a couple years for things to get back to pre-COVID days – unless more money printing starts to happen again.

I am in the boat that recession started last May 2022 – we are in a recession compared to COVID excesses – but still lots of money sloshing around for a while yet – only pain for some being hit with high interest rates.

Lisa_Hooker

2 years ago

Reply to Jack

“Too much of anything is bad, but too much good whiskey is barely enough.” – S Clemens

Salmo Trutta

2 years ago

Reply to Jack

A quote from Richard Werner:

Solving the enigma of the ‘velocity decline’

The problems arising from the implicit assumption that nominal
GDP (that is, PY) can be used to represent total transaction values (PT) are
obvious. GDP transactions are a subset of all transactions. The mainstream
quantity equation (2) that uses income or GDP to represent transactions will
thus only be reliable in time periods when the value of non-GDP transactions,
such as asset transactions, remains constant (thus dropping out when
considering flows). However, when their value rises, this will cause GDP to be
an unreliable proxy for the value of all transactions. In those time periods we
must expect the traditional quantity equation, MV ⫽ PY, to give the appearance of a fall in the
velocity V, as money is used for transactions other than nominal GDP (PY). This
explains why in many countries with asset price booms economists puzzled over
an apparent ‘velocity decline’, a ‘breakdown of the money demand function’ or a
‘mystery of missing money’ – issues that severely hampered the monetarist
approach to monetary policy implementation.”

Vi can move in the opposite direction as Vt. 1978 was a good example. And contrary to Werner, financial transactions are not random.

Christoball

2 years ago

Next months compound inflation will be a doozy.

KidHorn

2 years ago

In the past, it would be a given the FED would slash rates once the S&P dropped 20%, but they’ve never had an inflation scare like this. And the USD hasn’t been as precarious as it is now. I can see the FED keeping rates steady. Which is the smart move IMO. I can also see them lowering rates due to political pressure.

Sunriver

2 years ago

Pencil it in, a near zero Fed funds rates by Federal Election day Nov 2024.

The Fed hiking rates and supposed QT, is temporal. Just like the Fed’s temporal inflation call.

Given the amount of debt in the US, the economy can’t hope to subsist without a zero Fed rate forever. The hope of a fundamental normalization of asset valuations, via deflation, is lost forever.

Scooot

2 years ago

Reply to Sunriver

“Pencil it in, a near zero Fed funds rates by Federal Election day Nov 2024.”

I doubt it, not unless inflation is also near zero. If not, such aggressive rate cuts would cause the yield curve to swing very positive. Long end yields would be much higher than the Fed Funds rate and so therefore would mortgage rates. Voters are more concerned with mortgage rates and inflation than the Fed rate.

MPO45v2

2 years ago

Reply to Sunriver

There are 29 months between now and Nov 2024. There are 150,000 people being added to social security each month based on current trends which means by Nov 2024 there will be a minimum of 4.3 million people out of the labor force. This is just social security enrollments, others may retire without getting social security because they have the means to do it so let’s add another 500k which brings it to ~5 million. And there there are those dying from mass shootings or just old age, further depletion of the labor force.

There will also be more people with some type of disability, less productivity, and demand for higher wages. this is all inflationary, I wouldn’t bank on low(er) rates anytime soon unless some major black swan event like WW 3, Yellowstone eruption, or invaders from space.

Jack

2 years ago

Reply to MPO45v2

More like 17.5 mths than 29 mths. Does not really change your message though, just delays inevitable a year or so.

The last decrease in number of working persons happened after the plague in Europe where workers became the most valuable commodity and led to the end of feudalism.

MPO45v2

2 years ago

Reply to Jack

Oops. You are correct, I had a date in 2025 that I have been planning against as my baseline but the drop offs continue thru 2030 anyway so I think the Fed will keep rates high way longer than most people are willing to believe.

Lisa_Hooker

2 years ago

Reply to MPO45v2

There could be a highly contagious pandemic with a very high mortality, and unresponsive to magical mRNA.

Six000mileyear

2 years ago

The longer the 10 year yield moves sideways, the stronger the next yield move to the upside will be.

PapaDave

2 years ago

Looking to the longer term; I’m not concerned about the Fed or when it begins to cut rates. Nor am I concerned about the never ending debt ceiling negotiations. And I am not concerned if we will have a recession, as I expect it to be modest, assuming it happens at all.

Of greater interest to me is the coming decline in US shale oil production, which I expect later this year. The only way to turn this decline around will be higher oil prices, which will encourage more drilling. Rig counts are already on the decline and the best locations have been drilled already.

Couple that with OPEC cuts and still rising demand and it points to higher energy prices going forward. Which will keep inflation higher than what the Fed would like. Which means it will probably take longer for them to begin to cut rates.

whirlaway

2 years ago

Good. I have a few 3.10% 5-year CDs maturing in Feb 2024. Will be nice if the renewal rate is close to 5% at that time!

KidHorn

2 years ago

Reply to whirlaway

Most CDs have a 3 month interest penalty for early withdrawal. If you can convert it to 5%, might be worth it.

I’m in a similar situation and am thinking about it.

MPO45v2

2 years ago

The Fed has raised interest rates by 500% for about a year and by my math, the JOLTS only dropped about 18% with 9 million jobs still open.

Of course no one wants to believe those jobs are open despite help wanted signs all over the place and poor service in nearly every service oriented business so what does that matter…

In any event, if a 500% increase only resulted in a ~20% decline in job openings then we have a long road ahead to normalize the job market and inflation.

Lisa_Hooker

2 years ago

Reply to MPO45v2

It has become an American tradition to advertise jobs that don’t really exist in the hopes that someone will come along with exactly the skills you could use for something and willing to work for a pittance. The reading (scanning) of a résumé is cheap. If you have the time.

The Market Now Believes in a Much Tougher Fed Until November

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