For the last three months, traders have been positioned to expect a rate-cut in 2020 – disagreeing with The Fed’s forecast of more hikes. That changed this week as traders push their bets in eurodollar futures on a hike in 2020.
The Fed (red line below) expects rate hikes to continue through the end of 2020, and until recently as OIS (green) and ED (black) market expectations show, investors expected a net rate cut across 2020…
But now, as Bloomberg’s Ye Xie notes, not only have traders fully priced in two rate hikes in 2019 after two more this year, they are now moving to think that the Fed could extend the rate cycle through 2020. The spread between euro-dollar futures in December 2019 and 2020 is no longer inverted.
Admittedly, the spread is only 4bps, which translates to a 16% of a chance for a single 25bps rate-hike; but it is another move in the direction of The Fed’s thinking. Furthermore, it gives The Fed some runway in its belief that it can raise rates without having to worrying about cutting the expansion short.
Additionally, Bloomberg notes that there’s been some funny/strange action in Fed Funds Futures recently, ahead of Wednesday’s meeting/press conference. For example, the odds that the Fed goes 50 bp stand at 8%, up from zero a month ago. And while we don’t think that will happen (no reason for the Fed to spook the horses), it is clear that both Futures and shorter dated Treasuries expect the Fed to sound more aggressive this week.