Fed funds futures

FX Daily: Unwinding the spurious dollar rally

The dollar strengthened across the board yesterday with no clear catalyst. We suspect that in an environment that keeps pricing large Fed cuts, USD rallies aren’t very sustainable. We’ll be awaiting the next leap higher in short-term USD rates to endorse a dollar rebound. Today, the focus is on PMIs and the Bank of Canada, which may disappoint dovish bets.


USD: Sticky Fed cut bets hinder USD rebound

The dollar rebounded sharply yesterday as the risk-on mood generated by Beijing’s reported stock support package evaporated during London trading hours. The Hang Seng is having another good day today, even though Beijing’s measures appear an emergency and temporary solution, more a symptomatic treatment rather than addressing fundamental economic concerns.

European and US equities failed to follow the Hang Seng's gains yesterday but also showed broad resilience. The rise in US rates did not look large enough to justify the rota

China Continues to Increase Gold Reserves, While Base Metals Face Mixed Fortunes

US Fed Set to Resume Rate Hikes Amidst Mixed Economic Data: A Look at Key Indicators and Earnings Ahead

Ed Moya Ed Moya 24.07.2023 10:57
US The Fed is expected to resume raising rates at the July 26th FOMC meeting.  Fed funds futures see a 96% chance that the central bank will deliver a quarter-point rate rise, bringin the  target range to between 5.25% and 5.50%, almost a 22-year high. The Fed delivered 10 straight rate increases and then paused at the June FOMC meeting.  The Fed is going to raise rates on Wednesday and seems poised to be noncommittal with what they will do in September.  The economic data has been mixed (strong labor data/cooling pricing pressures) and that should support Powell’s case that they still could deliver a soft landing, a slowdown that avoids a recession.  This seems like it will be the last rate hike in the Fed’s tightening cycle, but we will have two more inflation reports before the Fed will need to commit that more rate hikes are no longer necessary. The Fed will steal the spotlight but there are several other important economic indicators and earnings that could move markets.  Monday’s flash PMI report should show both the manufacturing and service sectors continue to soften, with services still remaining in expansion territory. Tuesday’s Conference Board’s consumer confidence report could fuel expectations of a soft landing. Thursday’s first look at Q2 GDP is expected to show growth cooled from 2.0% to 1.8% (0.9%-2.1% consensus range) as consumer spending moderated.  Friday contains the release of personal income and spending data alongside the Fed’s preferred inflation and wage gauges. The Q2 Employment Cost Index (ECI) is expected to dip from 1.2% to 1.1%. The personal consumption expenditures price index is expected to cool both on a monthly and annual basis (M/M: 0.2%e v 0.3% prior;Y/Y: 4.2%e v 4.6% prior). Earnings will be massive this week as we get updates from 3M, AbbVie, Alphabet, Airbus, AstraZeneca, AT&T, Barclays, BASF, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Chevron, Chipotle Mexican Grill, Comcast, Exxon, Ford Motor, General Electric, General Motors, GSK, Hermes International, Honeywell International, Intel, Mastercard, McDonald’s, Meta Platforms, Microsoft, Nestle, PG&E, Procter & Gamble, Raytheon Technologies, Samsung Electronics, STMicroelectronics, Texas Instruments, Thermo Fisher Scientific, UniCredit, Unilever, Union Pacific, Verizon Communications, Visa, and Volkswagen
Assessing 'Significant Upside Risks to Inflation': Insights from FOMC Minutes

Assessing 'Significant Upside Risks to Inflation': Insights from FOMC Minutes

Ipek Ozkardeskaya Ipek Ozkardeskaya 17.08.2023 09:12
'Significant upside risks to inflation'  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  FOMC minutes released yesterday showed that most Federal Reserve (Fed) officials see 'significant upside risks to inflation that may require more tightening'. Policymakers cited a range of scenarios that included the rising commodity prices that could lead to 'more persistent elevated inflation'. Two of them favoured halting rate hikes, but the minutes showed no official dissenters. The Fed economists also expect a small rise (only) in jobless rate in the US, but they warned that commercial real estate fundamentals could worsen.   The regional banks are under a rising pressure, as a Fitch analyst warned that dozens of US bank credit ratings are at risk – just a week after the rating agency downgraded the US' credit rating, and Moody's downgraded 10 US small and mid-sized banks.   The US 2-year yield remained little changed at around the 5% mark, while the 10-year flirts with the 4.30% level, approaching last October's peak, raising questions among investors on whether levels above 4% are a good entre point in the US 10-year papers, or could it go higher? Looking at the net speculative positions, the rising US treasury yields attract investors. Asset managers' combined treasury positions hit a record in August, but that also means that these positions could be unwound and give way to a deeper selloff. The conclusion is, even though the actual levels look appetizing for US long-dated papers – especially with the Fed's nearing the end of its tightening cycle and trouble brewing in China. risks prevail. Activity on Fed funds futures gives less than 15% chance for a September rate hike in the wake of the latest FOMC minutes. That's slightly higher than around 10% assessed to a 25bp hike before the release of the minutes yesterday. But the pricing for a potential 25bp and even 50bp hike in November meeting are in play.   The US dollar extends gains, and the dollar index is now marching above its 200-DMA, into the overbought market territory, with little reason for investors to step back given the Fed's decided hawkish stance on its rate policy. The S&P500 extended losses below its 50-DMA yesterday and is preparing to test the 4400 support to the downside, while Nasdaq 100 closed below the 15000 level for the first time since end of June. Tesla dropped another 3% yesterday on news that it cut its car prices in China for the second time this year, and the shares closed the session at a spitting distance from the major 38.2% Fibonacci retracement, which should distinguish between the positive trend building since the beginning of this year and a bearish reversal.   Elsewhere, Target jumped nearly 3% yesterday after beating profit expectations when it released Q2 earnings yesterday. Lower costs boosted profit margins, and gross margins jumped 27% last quarter compared to 21.5% printed a quarter earlier, net income more than quadrupled. Shiny results helped investors overcome the 11% drop in online sales – vs. 5% growth nailed by Amazon, and the slashed sales and profit outlook. Again, despite the risk that US consumers may not spend much in the next few quarters, what we see in most data is that... they continue spending – and the resilience of spending starts weighing more on Fed expectations than the risks that don't materialize. 
Revised Forecasts for the National Bank of Hungary: Interest Rate Changes and Monetary Policy Outlook

FX Daily: Hawkish Tone from FOMC Minutes and Norges Bank Hike Impact

ING Economics ING Economics 17.08.2023 10:09
FX Daily: Someone is still hiking The July FOMC minutes signalled clear openness to more tightening, but market pricing did not move a lot. The FX markets seemed more sensitive to that, and the dollar is enjoying some good momentum. Meanwhile, Norges Bank should hike by 25bp today, and this may not even be their last move; we still see NOK gains ahead. USD: Hawkish minutes, reluctant pricing The minutes of July’s FOMC policy meeting released yesterday showed the majority of members kept seeing upside risks to the inflation outlook and left the door open for more tightening. That mirrors what was previously indicated in the dot plot projections, but we think that the encouraging developments on the disinflation side mean the Fed won’t have to hike again and will instead opt for a long pause before cutting in 2024. The dollar found some support after the release of the minutes, although the Fed Funds Futures did not move significantly, still pricing in a 30% probability of another Fed hike. The reluctance to price in a greater probability is keeping the dollar’s gains limited. On the data side, our US economist debriefs yesterday’s set of releases here. Mortgage rates are hitting fresh highs, but that is failing to trigger the kind of house price correction we see elsewhere in the world, as crushed supply keeps prices elevated. Ultimately, Fed rate cuts next year could be the trigger for a real estate price correction should that allow a rebound in supply. On the industrial production side, a strong read for July contradicted the ISM manufacturing index, which had suggested the sector has been contracting for nine consecutive months. Today, the jobless claims will be watched closely after a surprise jump last week, and the calendar also includes the Philadelphia Fed Business Outlook for August and July’s Leading Index. The dollar is enjoying some modest bullish momentum – also helped by more worrying news from China’s real estate sector - but it may be lacking a clear catalyst to break above 104.00 (DXY) before the end of the week.
Boosting Stimulus: A Look at Recent Developments and Market Impact

Boosting Stimulus: A Look at Recent Developments and Market Impact

Ipek Ozkardeskaya Ipek Ozkardeskaya 28.08.2023 09:15
Here, get more stimulus!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) Chair Jerome Powell's Jackson Hole speech was boring, wasn't it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed's will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell's comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia's stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.   What's up this week?  This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone's CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell's Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor's relaxed view on price growth – which remains slower than the BoJ's goal, but the possibility of a direct FX intervention to limit the USDJPY's upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ's incredible policy divergence versus the rest of the developed nations.   Here, get more stimulus!  The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That's lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country's biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.  Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That's partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.    
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
A bright spot If there is one bright spot in Britain with all this, it is the FTSE100. First, the rising energy prices are good for the energy-rich FTSE100. Second, softer sterling makes these companies more affordable for international investors, who should of course think of hedging their sterling exposure, and third, more than 80% of the FTSE100 companies' revenues come from oversees, which means that when they convert their shiny dollar revenues back to a morose sterling, well, they can't really complain with a stronger dollar. Consequently, if a more dovish BoE is bad for sterling, the combination of a hawkish Fed and a dovish BoE and a pitiless OPEC is certainly good for the FTSE100. The index has been left behind the S&P500 this year, as the tech rally is what propelled the American index to the skies, but that technology wind is now turning direction. The FTSE 100 broke its February to September downtrending trend to the upside and is fundamentally and technically poised to gain further positive traction, whereas, the S&P500 is heaving a rough month, with technology stocks set for their worse performance this year, under the pressure of rising US yields, which make their valuations look even more expensive.   Interestingly, the US 2-year yield peaked at 5.20% after the Fed's hawkish pause this week and is back headed toward the 5% mark, but the gap between the US 2-year yield and the top range of the Fed funds rate is around 40bp, which is a big gap, and even if the Fed decided not to hike rates, this gap should narrow, in theory. If it does not, it means that bond traders are betting against the Fed's hawkishness and think that the melting savings, the loosening jobs market, tightening bank lending conditions and strikes, and restart of student loan repayments and a potential government shutdown could prevent that last rate hike to happen before this year ends. And indeed, activity on Fed funds futures gives more than 70% chance for a third pause at the FOMC's November meeting, and Goldman Sachs now sees the US expansion slow to 1.3% from 3.1% printed in the Q3. KPMG also warned that a prolonged auto stoppage may precipitate contraction. And if no deal is inked by noon today, the strikes will get worse.   One's bad fortune is another's good fortune  The Japanese auto exports surged big this year, they were 50% higher in yen terms. The yen is certrainly not doing well, but yes, you can't have it all. That cheap yen is one of the reasons why the Japanese export so well outside their country. And in case you missed, the BoJ did nothing today to exit their hyper-ultra-loose monetary policy. They didn't even give a hint of normalization, meaning that the yen will hardly strengthen from the actual levels. In the meantime, Toyota, Mitsubishi and Honda shares are having a stellar year, and the US strikes will only help them do better. 
All Eyes on US Inflation: Impact on Rate Expectations and Market Sentiment

Inflation Fever Breaks: Fed Doves Energized as US CPI Falls, Markets React

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:14
Inflation fever breaks By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) doves got a big energy boost yesterday by a slightly lower-than-expected inflation report. The headline inflation fell to 3.2% in October from 3.7% printed a month earlier, and core inflation eased to 4% from 4.1% printed a month earlier. Services excluding housing and energy costs – the so-called super core figure closely watched by the Fed - rose only 0.2% and shelter costs rose only 0.3%, down from a 0.6% advance printed a month earlier. The soft set of inflation print cemented the expectation that the Fed is done hiking the interest rates. The US 2-year yield – which best captures the rate bets – tanked 24bp to 4.81%. The 10-year slipped below 4.50% and activity on Fed funds futures gives around 95% chance for a no rate hike in December. That probability stood at around 85% before yesterday's US CPI data.   In equities, the S&P500 jumped past its 100-DMA, spiked above the 4500 mark, and closed the session a few points below this level. Nasdaq 100 extended its gain to 15850. In the FX, the US dollar took a severe hit. The index fell 1.50% on Tuesday, pulled out a major Fibonacci support and sank into the medium-term bearish consolidation zone. The EURUSD jumped to almost the 1.09 level. Yes, there is no mistake – to nearly 1.09 level, and Cable flirted with the 1.25 resistance. What a day!   A small parenthesis on UK inflation   Good news came from Britain this morning, as well. Inflation in the UK fell 6.7% to 4.6% in October, lower than the 4.7% penciled in by analysts. Core inflation also eased more than expected to 5.7%. There is growing evidence that the major central banks' efforts are bearing fruit. Cable is sold after the CPI data, but the pullback will likely remain short-lived if the USD appetite continues to wane globally.   
FX Daily: Fed Ends Bank Term Funding Program, Shifts Focus to US Regional Banks and 4Q23 GDP

The Dollar's Dramatic Drop: Is the Bear Trend Overdone?

ING Economics ING Economics 16.11.2023 11:17
FX Daily: Dollar bears may have jumped the gun The dollar plummeted yesterday after a softer-than-expected US CPI reading. But we still think a turn in activity data - more than the disinflation story - is needed to take the dollar sustainably lower, and the move appears overdone also from a short-term valuation perspective. US retail sales will tell us whether the dollar can start to recover today. USD: Dollar slump looks overdone We had pointed to the risk of a USD correction yesterday given the chances of a soft CPI reading, and the tendency of the dollar to underperform after key US data releases/events. The move was, however, quite extreme. If position-squaring did play a role in exacerbating the size of the dollar correction, the depth of the drop in Treasury yields means the FX shifts have taken their cues from a substantial repricing of monetary policy expectations. The Fed funds futures curve erased any residual bet of monetary tightening after the lower-than-expected October inflation report, and now prices in the start of the easing cycle in June and 50bp of cuts by July. We have no reason to argue against this pricing from a macro perspective: our US economist discusses here how disinflation has much further to go, and we currently forecast 150bp of Fed cuts in 2024, still more dovish than the 97bp priced in by the market. However, we’d be wary of jumping too aggressively on a dollar bear trend now. First of all, markets have moved a lot after a softer inflation reading, even though the narrative of disinflation being well underway is something that would hardly surprise the Fed. The month-on-month core print, by the way, came in at 0.227%, not too far from a rounded consensus 0.3%. Resilient growth is what's been keeping the dollar stronger, and while we expect the US to head into recession in 2024, there is no hard evidence just yet. In other words, strong US activity figures remain a very clear possibility in the near term and could trigger an inversion in the US bear run. Secondly, rates have moved significantly, but not enough to justify the huge dollar drop. According to our short-term fair value model, the dollar has moved into undervaluation (after the US CPI release) against all G10 currencies except for the Japanese yen, Canadian dollar and Norwegian krone. This is quite remarkable given the dollar had been generally overvalued in the short term for many months. Today, October retail sales will be watched closely after coming in very strong in September. Consensus is for a 0.3% MoM decline in the headline figure but a 0.2% increase in the index excluding auto and gas. The dollar should be very sensitive to the release. A soft reading may fuel speculation that softer growth is coming through and could add to disinflation to trigger more Fed dovish bets. However, US activity data has had a tendency to surprise on the upside, if anything, and it may be too early to see a slew of soft readings. Our view is that this USD bear run is overdone, and we expect another, or a few more rounds of dollar resilience into the New Year before a clear-cut dollar decline can emerge. PPI data will also be watched for confirmation that the disinflation process effectively accelerated in October. On the geopolitical side, keep an eye on headlines from the Biden-Xi Jinping meeting at the APEC summit.
Crude Oil Eyes 200-DMA Amidst Positive Growth Signals and Inflation Concerns

Navigating the Murky Waters: Decoding the Federal Reserve's Chaotic Rate Cut Signals and Market Implications

Ipek Ozkardeskaya Ipek Ozkardeskaya 18.12.2023 13:47
The uncertainty surrounding the Federal Reserve's (Fed) stance on rate cuts has created a complex narrative that demands close attention. As the Fed hinted at a potential halt to its monetary tightening efforts, European policymakers resisted aligning with this sentiment. Notably, Fed members like John Williams and Raphael Bostic have contradicted expectations of a rate cut. Despite this, Fed funds futures activity indicates a high probability of the first rate cut by March next year, with a more than 75% chance, and a near 100% chance of the first cut in May. The market anticipates around a 150 basis points cut throughout the next year, doubling the 75 basis points cut predicted by Fed officials. This ambitious projection clashes with the current resilience of the US economic growth.   Long Japanese yen By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve's (Fed) rate cut talk becomes chaotic and frankly, hard to follow. After the Fed signaled a possible end to its monetary policy tightening campaign and the European policymakers refused to adhere, some Fed members including John Williams and Raphael Bostic pushed back the Fed cut expectations.   Alas, activity on Fed funds futures price in the first Fed cut by March next year with more than 75% chance, and the first cut in May with almost a 100% chance. The market pricing matches the expectation of around 150bp cut throughout next year, versus only 75bp cut foreseen by Fed officials – which is already ambitious given the resilience of the US economic growth. Therefore, either the US economy will do fine, and the Fed won't start cutting rates in March. Or we will see a sharp slowdown in the US growth and a potentially deteriorating growth outlook will force the Fed to start cutting the rates in Q1 and cut thoroughly. But a scenario where the Fed starts cutting rates in March while economy remains resilient and inflation low makes little sense as the fiscal spending will remain robust into next year's presidential election and maintain the risk of a U-turn in inflation alive.   But anyway, investors could give the Fed doves the benefit of the doubt until Friday's PCE data. The PCE, the Fed's favourite gauge of inflation, is expected to show a further decline in both headline and core inflation. More importantly, if the data matches expectations, it would mean that 6-month annualized inflation will be a touch above the Fed's 2% target. The latter could keep the Fed doves in charge. Nonetheless, the successful alleviation of inflation can be attributed to the decline in oil prices. Even though the base case scenario is a limited upside potential in oil prices, any reversal in oil price dynamics could tame the Fed cut expectations. In the short run, the barrel of American oil is around the $72pb on Monday on the back of lower Russian exports and suspended transit in the Red Sea due to attacks by the Houthis on ships in the region. Solid offers are seen into $74/75pb range. 
Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

ING Economics ING Economics 25.01.2024 15:02
FX Daily: Unwinding the spurious dollar rally The dollar strengthened across the board yesterday with no clear catalyst. We suspect that in an environment that keeps pricing large Fed cuts, USD rallies aren’t very sustainable. We’ll be awaiting the next leap higher in short-term USD rates to endorse a dollar rebound. Today, the focus is on PMIs and the Bank of Canada, which may disappoint dovish bets.   USD: Sticky Fed cut bets hinder USD rebound The dollar rebounded sharply yesterday as the risk-on mood generated by Beijing’s reported stock support package evaporated during London trading hours. The Hang Seng is having another good day today, even though Beijing’s measures appear an emergency and temporary solution, more a symptomatic treatment rather than addressing fundamental economic concerns. European and US equities failed to follow the Hang Seng's gains yesterday but also showed broad resilience. The rise in US rates did not look large enough to justify the rotation from European FX (EUR and GBP) back into the dollar. In all, we admit the dollar jump was quite surprising, and without a clear catalyst, and therefore see room for the dollar correction initiated overnight to extend today. One dynamic to keep an eye on – however – is the impact on markets of US Republican Primaries. The underperformance of the Mexican peso since the start of the week may be indicating markets are pricing in a larger chance of Donald Trump winning the presidency after Ron DeSantis endorsed him. Trump won the New Hampshire primary yesterday, securing 55% of votes and casting serious doubt on the future of Nikki Haley’s campaign. It all seems rather premature, but Banxico is also on the brink of a rate cutting cycle – as discussed here by our rates team – which can compound to keeping the peso soft. This should not translate into a one-way direction for the peso though, we still expect to see high demand in the dips, not least due to the preserved carry attractiveness and our view of a US dollar decline. Today, the focus will be on S&P Global PMIs across developed countries. Markets have become gradually more sensitive to this US survey, even though the ISM remains the main reference. Expectations are for a tiny decline in manufacturing PMIs (already in contraction area) and a stabilisation in services. We don’t have a strong bearish view on the dollar in the short-term, but yesterday’s moves did appear overdone in an environment where Fed funds futures still price in 130/140bp of cuts this year. We’ll be more convinced of the sustainability of a near-term dollar rebound once short-term Treasury yields take another leap higher (two-year rates are down nearly 10bp since yesterday). Revamped rate hike bets in Japan are pushing USD/JPY lower this morning, favouring a broader dollar correction which could have legs today. Francesco

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