Rates Market Starts Pricing In A Fed-Fold

While equity markets have cratered in recent weeks, amid a constant barrage of disappointing macro data and hawkish sentiment from The Fed, something has suddenly changed in the last few days.

As asset price declines accelerated, market expectations for rate-hikes have eased off their uber-hawkish forecasts…

In fact, in the last few days, rate-hike expectations have dropped as subsequent rate-cut expectations have jumped…

Most notably, the ‘guaranteed’ 50bps hikes for June and July are now starting to be discounted with the market now less than assured of a 50bps July hike…

As JPMorgan’s Andrew Tyler notes, “I think it is unlikely we see the Fed pivot at this stage in the tightening cycle. Per Powell, he and the Fed need to see material evidence of slowing inflation. While the September Fed meeting is one where we could see a pivot that essentially leaves 3 more CPI prints to prove the case (the release date for August CPI is Sept 13 which falls within the Fed blackout period).”

Odds of a 50bps hike in September have fallen dramatically since the FOMC meeting from 80% to less than 40% now…

Maybe the recent and sudden reversal lower in the dollar is also pricing in a Fed flip-flop?

Has the dramatic tightening of financial conditions been enough to spook The Fed (even though Powell has only just begun to raise rates)?

Has the biggest absolute monthly drop in US money supply spooked The Fed (even before it has even started QT)?

Finally, we note that the market is now pricing in a peak ‘terminal rate’ by March 2023 of 2.885%, lower and sooner than the 3.19% by April 2023 that was priced in a month ago.

The question is – will The Fed use today’s release of the May Minutes to reinforce its “whatever it takes” attitude towards fighting inflation or play the ‘data-dependent’ game offering something for everyone?

The market’s shift should be inferred as a fall in the faith that The Fed will stick to its task – Fed credibility is on the line once again… and in an election year too, its independence will be under ever more scrutiny.