What signal? Traders are once again crazy betting on the Fed to cut interest rates by 50 basis points this week

Zhitong
2024.09.16 13:20
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Bond traders are once again betting that the Federal Reserve is more likely to cut interest rates by 50 basis points at this week's meeting than by 25 basis points. Pricing in the derivatives market indicates that the probability of a 50 basis point rate cut has exceeded 50%. This has led to the two-year US Treasury yield falling to a two-year low and the US dollar index dropping to its lowest level this year. Analysts have differing views on the Fed's decision, with Rabobank expecting a 25 basis point rate cut, while Societe Generale believes that market conditions may force the Fed to cut rates by 50 basis points. Standard Chartered Bank has warned that the risk of a 50 basis point rate cut is greater and could lead to an increase in the unemployment rate

According to the Zhitong Finance and Economics APP, bond traders once again believe that the possibility of the Fed policymakers cutting rates by 50 basis points at this week's meeting is greater than 25 basis points.

Related swap pricing associated with the Fed's interest rate decision on Wednesday local time shows that after almost completely ruling out the option of a 50 basis point rate cut last week, the probability has once again exceeded 50%. This has pushed the two-year US Treasury yield back to its lowest level in two years, dragging the US dollar index to its lowest level since January this year.

The pricing reversal over the past few trading days has increased the risks surrounding the decision on September 18. Investors are conflicted about how much policy support the economy needs and what signal the Fed's decision to significantly cut rates and start a loose cycle will send.

Senior US strategist at Rabobank, Philip Marey, wrote, "This is a close call." He expects the Fed to cut rates by 25 basis points. "Powell's lack of guidance may indicate that the FOMC has not yet reached a consensus. More importantly, Tuesday's retail sales could still change the calculus."

Macro strategist at Societe Generale, Kit Juckes, said the market could force the Fed to cut rates by 50 basis points. He added that US retail sales and industrial production data in the coming days could influence people's views. He said if weak retail sales push pricing higher, the FOMC may be concerned about falling behind.

However, some major banks remain cautious about a 50 basis point rate cut by the Fed. Standard Chartered Bank issued a statement on Monday stating that a 50 basis point rate cut by the FOMC at the upcoming meeting could be worse than a 25 basis point cut.

The institution pointed out, "Economic data does not provide convincing reasons for a 50 basis point rate cut at the upcoming meeting." Standard Chartered Bank further added, "A 50 basis point rate cut and being wrong may be worse than a 25 basis point cut and being wrong."

The bank emphasized that Powell and the Fed cannot disappoint the market. The company believes that the risks of a 50 basis point rate cut are greater, as this could lead to an increase in the unemployment rate in September.

Standard Chartered Bank believes that a 25 basis point rate cut could have an impact and attached a clear message: "The FOMC will closely monitor the situation regarding a 50 basis point rate cut."

Market Turmoil

All of this is happening against the backdrop of escalating political tensions in the United States. The FBI is investigating an apparent assassination attempt against former President Trump, who just two months ago survived a shooting at a rally in Pennsylvania On Monday, the two-year US Treasury yield briefly fell by 4 basis points to 3.54%, continuing its rise after a sharp drop from a high point of over 5% at the end of April. Futures for the three major US stock indexes showed mixed movements.

With Federal Reserve members in a blackout period ahead of the policy meeting on September 17-18, traders had little data to rely on, including the August retail sales data released on Tuesday.

At the same time, expectations of repricing also affected the US dollar, which has weakened against most major currencies over the past month. The Japanese yen was one of the strongest currencies, breaking through the key level of 140 yen per US dollar on Monday.

Strategist Rodrigo Catril from National Australia Bank stated, "We believe that the Federal Reserve is about to enter a new easing cycle, which is a major negative factor for the US dollar. As the Fed eases monetary policy next year, lowering the fund rate to neutral or even below neutral, the dollar will begin a cyclical decline."

Although a technical indicator suggests that the dollar will find support as momentum turns bearish, the majority of the market believes that the dollar will weaken. A survey of analysts indicates that by this time next year, the euro, yen, Canadian dollar, and Australian dollar are all expected to strengthen against the US dollar

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