Traders ramp up bets on Big Fed Cut to get market moving

(Bloomberg) — Traders added to bets on a big interest rate cut from the Federal Reserve, with the market now effectively split on the size of the move this week.

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Swaps tied to Wednesday’s Fed decision are priced at about a 50% chance of a half-point cut, after virtually ignoring the possibility entirely last week. That pushed the two-year U.S. bond yield back to a two-year low and dragged a benchmark dollar to its weakest since January.

Roughly the price change over the past few sessions has raised the stakes for the September 18 meeting. Investors are conflicted about how much policy support the economy needs and what the Fed’s decision to start its easing cycle with a big cut would mean. signal.

“It’s a close call,” wrote Philip Marey, a senior U.S. strategist at Rabobank, who expects the Fed to produce a quarter-point standard rate cut. “The lack of guidance from Powell could indicate that the FOMC has not yet reached a consensus. In addition, Tuesday’s retail sales could still change the calculation.”

It all comes against the backdrop of an increasingly difficult political situation in the US. The FBI is investigating an apparent assassination attempt against former President Donald Trump, just two months after the Republican presidential candidate was shot at a rally in Pennsylvania. For now, the market has looked beyond development, with U.S. stock futures pointing to modest gains at the open.

The yield on two-year Treasuries traded three basis points lower on Monday at 3.55 percent, extending a rally that saw the yield collapse from a high of more than 5 percent in late April.

With Fed members in a deadlock ahead of the Sept. 17-18 policy meeting, traders have little data to rely on, including Tuesday’s August retail sales.

Meanwhile, the reassessment of expectations has weighed on the dollar, which has weakened against most major currencies over the past month. The yen was among the biggest gainers, advancing above the closely watched level of 140 per dollar on Monday.

“We see a new and imminent Fed easing cycle as a major headwind for the dollar,” said Rodrigo Catril, strategist at National Australia Bank Ltd. “The dollar will enter a cyclical decline as the Fed eases and takes the fund rate to neutral. , if not below, next year.”

The story continues

While one technical indicator signals support for the dollar as momentum turns bearish, the market is largely in the camp of a weaker US currency. The euro, yen, Canadian and Australian dollars are expected to strengthen against the greenback by this time next year, according to Bloomberg analyst surveys.

–With help from Michael G. Wilson.

(Updates throughout.)

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