Record-breaking trading volume! Heavyweight employment report and senior officials from the Federal Reserve "stir up the wind and set the fire", futures trading betting on rate cuts skyrocketing

This Friday, there was a heavyweight non-farm payroll report followed by a speech from Fed official Waller, who ranks high in internal influence at the Federal Reserve. Investors' bets on a Fed rate cut have been repeatedly overturned, with trading volumes of related futures contracts hitting record highs.

Bloomberg compiled data shows that as of 1:00 PM Eastern Time on Friday, September 6th, or 1:00 AM Beijing Time on Saturday, the trading volume of the second-tier contract of the most actively traded U.S. federal funds futures reached 900,000 contracts, setting a new single-day trading volume record for any contract since the appearance of this trading instrument in 1988. The trading volume for October contracts also hit a new high, surpassing the historical high set in March 2023, the month when the collapse of Silicon Valley Bank shook the financial markets.

The surge in trading volume of federal funds futures on Friday was driven by two main factors. First, the U.S. August non-farm payroll report released before the U.S. stock market opened.

The report showed that 142,000 new non-farm jobs were added in August, accelerating from July but still below Wall Street's expected increase of 165,000. The employment numbers for June and July were also revised downward by a total of 86,000. The unemployment rate in August, after rising for four consecutive months, fell from 4.3% in July to 4.2%, in line with expectations. An article on Wall Street News mentioned that the report data has increased the possibility of a larger rate cut by the Fed in September, with market expectations for a 50 basis point cut rising to 50%.

Furthermore, during the early trading session of U.S. stocks, Fed Governor Waller, who permanently holds voting rights at the Federal Open Market Committee (FOMC) meetings, made a speech advocating for a rate cut.

Waller believes that as the risks of further weakness in the labor market increase, it is crucial for the Fed to start cutting rates in September. He maintains an open attitude towards the magnitude and speed of rate cuts. In appropriate circumstances, he does not rule out the possibility of a larger rate cut. Waller stated that if necessary, he would advocate for a front-loaded rate cut. In other words, he does not rule out the possibility of a relatively larger rate cut from the beginning. However, Waller did not commit to a 50 basis point rate cut at the September FOMC meeting. He does not believe that the U.S. is currently in or will fall into an economic recession, stating that "a series of rate cuts would be appropriate."

Nick Timiraos, a reporter known as the "New Fed News Agency," later commented on Waller's speech, stating that Waller did not explicitly mention 25 or 50 basis points, but he leans towards supporting a 25 basis point rate cut initially and explicitly keeping the option to "discretionarily" accelerate the pace of rate cuts when "new data" shows further economic deterioration. Timiraos highlighted several "if" statements in Waller's speech, with annotations added by Timiraos in parentheses and additional notes from Wall Street News in square brackets:

"If the data shows the need for a larger rate cut, I will also support it. When inflation accelerates in 2022, I am a staunch supporter of front-loaded rate hikes, and if appropriate, I will support rate cuts in the same manner." Bloomberg pointed out that on Friday, the trading volume of federal funds futures surged along with significant price fluctuations. The trading range of futures contracts was 15 basis points, with a high of 95.12 and a low of 94.97. The increase in trading volume seems to stem from the unwinding of long positions targeting a 50 basis point rate cut at the September FOMC meeting. However, the directional bias of the day appeared to be a mix of buying and selling.

The fund flow of federal funds futures on Friday included several large trades. Before Powell's speech, at 10:04 am Eastern Time, 12,000 contracts were sold at a price of 95.025. After his speech, at 11:04 am Eastern Time, 25,000 contracts were sold at a price of 95.050, and at 11:32 am, 20,000 contracts were sold at a price of 94.98