Heading into last week’s FOMC meeting, futures markets were pricing in close to an 80% chance of at least one rate cut from the FOMC between now and the January 2020 meeting in less than eight months. In his press conference following that meeting, Fed Chairman Jay Powell did his best to reset market expectations by arguing that recent low inflation readings are transitory and by saying that the FOMC wasn’t currently leaning in one direction or the other with respect to its next move on rates.
The result of Powell’s non-dovish remarks (but definitely not hawkish either) was a relatively sharp reversal in equity prices and a re-pricing in the futures markets regarding the likelihood of rate cuts between now and January. By last Friday, the market was only pricing in a slightly better than 50-50 chance of a rate cut by the January 2020 meeting.
In the span of the last three trading days (and a Sunday tweetstorm from the President regarding China), though, traders in Fed Funds futures are once again back to pressing their bets on the possibility of rate cuts. As of this morning, those odds have moved back up to 66%.
Recent moves in the yield curve are also starting to suggest that the FOMC may have to blink. After a brief inversion in late March, the yield curve, which we measure as the spread between the yields on the 10-year and 3-month treasuries, started to steepen again in April, which likely caused a sigh of relief in the halls of the Federal Reserve. Over the last few days, though, the flattening trend has returned with vigor and as of this morning is just one basis point from inversion again. If that happens, there’s a good chance that it won’t sit well with markets.Start a two-week free trial to Bespoke Institutional to access all of our market, earnings, economic, and FOMC analysis.