How many Fed rate cuts does the market “expect”? – Commerzbank

Friday’s US labor market report was not a clear surprise on the negative side. As a result, there was no clear market reaction, but rather a fair amount of back and forth before equilibrium was established. That this was slightly below pre-BLS levels is not particularly telling. What is important is that at current levels, visible negative surprises in the USD are needed to further weaken the greenback. A self-sustaining push towards further USD weakness, regardless of numbers, is no longer discernible at current levels – unlike much of August, when USD weakness was virtually a foregone conclusion, notes Ulrich Leuchtmann, head of FX and Commerzbank’s Commodity Research.

Less than 100 basis points is not necessarily positive for the USD

“Market expectations about the Fed’s interest rate policy in the near future are already quite extreme. More than 25 basis points of interest rate cuts are included in the Fed’s decision next week. And over 100 basis points by the end of the year. Now, there may be early signs that the US labor market is weakening. But it seems brave of the market to bet so heavily that this trend will become so dramatically more visible before the end of this year that the Fed will cut rates by at least 50 basis points at one of its three remaining meetings in 2024. “

“Don’t be fooled by the word ‘market expectation.’ A market expectation does not indicate what the market is most likely to anticipate. The average investor is in the unpleasant position of having to take losses on many of his assets: stocks are likely to underperform, the value of his own home would be lower, and worries about his own job would reduce his income risk-adjusted future employment. . Therefore, it makes sense to bet on a US recession in the Fed Funds Futures market to an extent that significantly exceeds the likelihood of one happening.”

“In other words, especially in a situation where a US recession is not so likely but not so improbable that this scenario can no longer be ignored, risk premiums in the federal funds futures market are certainly huge. The figure above therefore does not mean that the average market participant expects more than 100 basis points of Fed rate cuts by the end of the year. Consequently, if it’s less than 100 basis points, that’s not necessarily a bullish argument for the USD.”