Fed Fund Pricing Gyrations - Economist | Federal Reserve Guidance

Fed Fund Pricing Gyrations - Economist | Federal Reserve Guidance | Market Pricing - Point of Convergence

Hi,

Feels like a long hiatus since I wrote the last post. A family commitment followed by fever impeded my writing. Let me begin this post with a quote from Dreyfus and Kelly - "The task of a craftsman is not to generate meaning, but rather to cultivate in himself the skill of discerning the meanings that are already there". A trader like a craftsman, must develop the ability to acutely discern data, market narrative, the leanings and positioning all at once and constantly reassess developments in his mind. The better a trader can do this, the greater is the skill level.

A lot has transpired in markets and the Economic data keeps the pendulum moving between soft landing and recessionary concerns. Let's look at the interest rate pricing and what are the points where I'm looking to fade the moves. This will be part 1 of blog post and in the second blog post we cover Economic data prints in detail.

The Interest Rate Pricing by Sell Side Economists is tabulated below -- median expectations are for a 75 bps cut in 2024 and 100 bps cut in 2025. The most hawkish estimates call for 100 bps of rate cuts until 2025 and the most dovish estimates call for 250 bps of rate cuts until 2025 with the median pricing at 150 - 175 bps of rate cuts into 2025.

The Fed's June SEP median projections showed Fed Funds Rate at 5.10% for 2024 and 100 bps of rate cuts into 2025 and 2026 each with long run neutral rate at 2.80%. With EEFR at 5.33% and long run neutral rate at 2.80%, there is 250 bps of room to cut rates. Should data deteriorate dramatically, the timeline to cut rates advances and if the US Economy continues to sing along, gradual cuts to destination Neutral can be expected.

The Current Fed Fund Futures are pricing in 95 bps of rate cuts into 2024. The probability of Fed Fund Rates has shifted after the accentuated sell off on Aug 5 and will likely pendulate between now and Sep 18 Policy.

The Fed's 18th September policy meeting SEP (Statement of Economic Projections) will detail the median rate cuts estimate for the November + December Policy and that's the point where Markets recalibrate expectations.

Until then, we have 1 more set of employment data (Sep 6) and inflation (Sep 11), benchmark revision to Establishment Survey data of the NFP on Aug 21, Chair Powell's Speech at Jackson Hole symposium on Aug 23, alongside Federal Reserve Commentary to heed to.

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Federal Reserve Chairman Bowman makes a very interesting point in his speech dated 10 Aug 2024 on the benchmark revision to Establishment Survey data.

"The Q4 QCEW (Quarterly Census Employment and Wages) administrative data suggests that the actual employment gains (new jobs) per month from March 2023 to December 2023 were about 110,000 lower than what the CES survey had reported. This means that CES might have overestimated the number of jobs added during that period."

Benchmarking Process:

The Bureau of Labor Statistics (BLS) typically benchmarks the CES data against the more comprehensive QCEW data once it becomes available. This is done to adjust the CES estimates to align more closely with the actual employment levels reported by businesses.

Implication of Q4 QCEW Data:

Although the BLS will use the Q1 2024 QCEW data (to be released on August 21, 2024) to benchmark and adjust the CES estimates, the Q4 2023 QCEW data indicates that there was likely a significant overestimation in CES employment gains for 2023.

This suggests that when the CES is benchmarked using the Q1 2024 QCEW data, the reported job growth figures for 2023 might be revised downward substantially.

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I like to juxtapose the Fed Fund Pricing with Fed Guidance and the market median expectations to fade the extremes. What I'm thinking right now is if at all we get repricing in Fed Funds Rate to 50 bps or lesser for 2024, I would fade the move at the hawkish end to receive rates further.

Let me know what you think ? You can email me @ vaishali.bagchi@gmail.com to share your thoughts.

Comments

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