Anticipation builds: Fed chair Jerome Powell on television screens in the New York Stock Exchange. Fed officials have been giving mixed signals about the size of the next rate cut that might come in November. — AP
New York: The debate over the magnitude of the US Federal Reserve’s (Fed) expected interest-rate cut in November is intensifying, with traders ramping up wagers in futures keyed to the central bank’s path as officials start to weigh in on their next move.
After weaker-than-expected readings from US consumer confidence data, investors leaned a bit more toward a second straight half-point easing at the Nov 7 decision.
The upshot is that it’s essentially become a coin toss in the swaps market between another outsized reduction and a more standard quarter-point move.
Swaps traders are now pricing in approximately three-quarters of a point of total cuts over the remaining two Fed decisions this year – with the second one coming Dec 18 – implying a half-point move at one of the gatherings.
“We’re increasingly in that 50-basis-point camp,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston. “Although officially we haven’t changed our stance, which is two quarter points this year – so one in November and one in December.”
Positioning figures show the rates market has started gearing up for Nov 7 since last week’s decision.
Open interest in two-year note futures has increased sharply.
The amount of positions held by traders in the maturity, which closely follows the Fed’s anticipated trajectory, has climbed to around 4.4 million contracts for the December 2024 tenor, the most yet.
There’s also been a marked uptick in wagers in December futures linked to the Secured Overnight Financing Rate.
However, with various policymakers sending mixed signals on the November meeting, traders are stopping short of betting heavily in one direction at this point.
That’s unlike the lead-up to the Fed’s half-point cut on Sept 18, when futures bets were favouring that size of a reduction.
Fed governor Michelle Bowman said the central bank should lower rates at a “measured” pace, after two other officials downplayed the odds of a half-point cut the day before.
Meanwhile, the Chicago Fed’s Austan Goolsbee said rates need to be lowered “significantly”.
Meanwhile in cash Treasuries, the bullish momentum leading into last week’s Fed meeting remains intact, with JPMorgan Chase & Co’s Treasury clients holding net long positions steady in the week through Sept 23.
The yield on the benchmark 10-year note drifted up around a dozen basis points in the period to about 3.73% as the bond market’s big curve-steepener trade gained steam following the Fed’s rate cut. — Bloomberg
