Stocks and bonds surged on the news, with the S&P closing up 5.5% and the Nasdaq gaining a whopping 7.4% on optimism that the Fed might slow its pace of hikes. #nasdaq #stocks #marketstocks #stock #bonds #forex #futures #crypto #trading #trader #proptrading
Fed funds futures are implying a terminal rate of 5% in 2023… will they get all the way up there before the economy implodes…? Recently both Canada and Australia have made smaller than expected rate increases to protect their economies…
Fed funds futures traders now see a 21% chance of a 75-basis-point hike in June
saw this on reddit and thought it was interesting. original post Source Marketwatch. Friday’s consumer-price index report for May — which showed the annual headline U.S. inflation rate climbing to 8.6% in May, with few signs of having peaked — is boosting the chances of a jumbo-sized rate increase by monetary-policy makers as soon as next week, and eliciting dire warnings that central bankers have completely lost control of prices. Fed funds futures traders now see a 21% chance of a 75-basis-point hike in June, up from just 3.6% on Thursday, according to the CME FedWatch Tool. Economists at Barclays BARC, -3.69% and Jefferies backed up the shifting expectations, by indicating they expect policy makers to deliver a hike of that magnitude at their June 14-15 meeting. Beneath the issue of where the Fed goes from here is a much more fundamental and serious problem: Some observers fear the U.S. central bank has already effectively lost control of inflation. May’s price gains were broad-based — hitting everything from shelter to gasoline and food, as well as the narrower gauge, the so-called core reading, that excludes food and energy. The data were “catastrophically bad” for both the Fed and Americans, said Nancy Tengler, chief executive and chief investment officer of Nashville-based Laffer Tengler Investments, which oversees $1.1 billion. “What we saw in this report which was disappointing and a little alarming is that the core reading, excluding food and energy, came in hotter than expected and that’s after we dropped off from a very high number for April 2021,” she said via phone. “This is a much more persistent and stickier kind of inflation that takes years to work through the system.” “The Fed has been wrong at every single turn and we should be seeing a 75 basis point hike at the June meeting,” Tengler said. “The question is whether they can surprise and I don’t think we are going to see that. Every time they delay, that allows inflation to run rampant and this raises the odds of recession.” Equity markets will be “ugly and choppy through summer because inflation numbers are not going to improve.” Indeed, traders of derivatives-like instruments known as fixings have expected a string of annual headline CPI readings that rises to as high as 8.8% in August and September, before settling to 8% for October. Meanwhile, U.S. consumer sentiment plunged to a record low this month. September outlook “All in all, the report should be of great concern for the Fed given that price gains in both the headline and the core measures show no signs of abating, and we expect prices to continue to register firm gains in the near term,” TD Securities strategists Oscar Munoz, Priya Misra and others wrote in a note. “We expect the Fed to maintain its aggressive tightening bias in the months ahead, look for the Committee to hike rates by 50bp both next week and in the July FOMC meeting, and believe a 50bp hike in September may not be out of the question.” A team at Goldman Sachs Group Inc. GS, -5.65%, led by Jan Hatzius, agreed with TD’s September assessment, by saying “we now expect the Fed to hike the funds rate by 50 bps in September (vs. +25bp previously), in addition to +50bp moves in June and in July.” “Today’s report should extinguish any pretense that a ‘pause’ in rate hikes will likely be appropriate by the end of summer, as the Fed is clearly still behind the eight ball on bringing inflation under control,” said Jason Pride, chief investment officer of private wealth at Glenmede. “Investors should expect the Federal Reserve to continue on its 50-bp rate hike path next week and beyond until inflation shows meaningful signs of decelerating toward the Fed’s 2-3% target range,” Pride said. “Today’s CPI report was a doozy,” said Tom Graff, head of investments at Facet Wealth. “While we knew the headline number would probably come in high due to food and energy prices, consensus was that the month-over-month Core CPI would slow sequentially,” he wrote in an email. “Unfortunately that didn’t happen. Headline CPI came in a full 1% for the month and a 40-year high 8.6% for the year, and core stayed steady at +0.6% for the month and 6.0% for the year.” “The most concerning part of this report was its breadth. The monthly number wasn’t driven by a few items. Most of the major categories actually accelerated price increases month-over-month. Most observers agree that broader inflation is more likely to persist.” “Friday’s inflation data suggests the ‘peak inflation’ debate may be premature,” said Nancy Davis, founder of Quadratic Capital Management. “The idea of peak inflation assumes that our supply chain disruptions are over and won’t recur anytime soon and I’m not so sure we can be confident of that.” “Investors remain too confident that the Federal Reserve will be able to control inflation,” Davis said by email. “We should not take the Fed’s ability to control inflation as a given.”
Fed funds futures curve. 6,9,12,13,14, and 15 month forward contracts As I mentioned in yesterday's post, the Fed funds futures curve is inverting. Today that inversion accelerated heavily. I'm not sure how this is not getting more media coverage as this is super important (if you've seen any news on this could you please let me know). This is not just the case of yields going down as traders digest things such as the possibility of peak inflation etc. That is one thing and quite normal. This is anything but normal. This is sophisticated investors betting that the economy is going to be hit so hard by the rate hikes that its predicting the FED will need to start lowering rates mid next year...basically a hard landing that will likely require restarting QE. None of the "gurus" are talking about it, but I do see that it's making some headlines: The Fed is about to whack the economy and will be forced to slash interest rates sharply in 2023, traders predict Judging by the upvotes on yesterday's post. Either people are getting an early start to the long weekend or they don't care about the fed funds futures curve (or they don't like the way I presented it which is fair). In any case, this is big... Speaking of the long weekend. I'll likely go to my summer cottage for much of next week. I could sure use some time to reflect by the waters edge...Cell coverage is spotty, so I wont post much, but I look forward to reading your posts. How does Sad-Ratio make so much effin money? ;-) What's going on with "The Triangle" :-) ? What's Basis' AI cooking up? Why did I dump half my short vol the day before vol declined by 7%? lolol Stay Safe, Stay Liquid, and enjoy the long weekend! -Chris
Fed Funds Rate Options and Futures have a contract size of $4,167. Where does this number come from?
The contract size (multiplier) for CME Fed Funds Rate futures and options contracts is exactly $4,167. Does anyone know precisely where this value comes from? For example, oil futures are 1,000 barrels per contract, and gasoline futures are 42,000 gallons per contract because 1 barrel holds 42 gallons. Any ideas? Link to Contract Specifications
The market is pricing in an 80-90% chance of a 75 basis point hike in June despite Powell saying that's not on the table yesterday
When I read it, I thought.. gee.. I wonder how I can partake in this type of gambling?
How are the "odds" calculated?
Suppose I think JPow is true to his word and 50 bips is the max.* How can I bet on this? How much can I make? How much can I lose?
At the risk of looking like an idiot, I present to you my findings after spending a few hours researching. *: He never promised only +50 bips. See transcript at bottom.
About Fed Funds Futures
So, I started looking into FFR futures (ZQ). I could use another set of eyes on it because I suspect I'm calculating something wrong, and it seems like an interesting discussion, anyway. Reading into the ZQ contract specs, they work as follows: At the end of the month of the contract, it settles financially at a price of 100 - average-EFFR-rates-for-that-month published here. Eg, at the end of the month it's calculated as: summing up the daily EFFR rates and dividing it by the number of days in that month. (It appears that weekends are counted as well, and use the value of the preceding Friday... though I'd like confirmation of that.) So if EFFR averaged 1 for the month, the contract would settle at 99. As for rate hikes mid-month, CME provides a probability calculator and some interesting stats here, and the methodology of computing % is here... though I don't fully understand it and can't get my calcs to match 87.1% (value on the calculator at time of writing). I don't actually need the percentage to calculate gains/losses, but I'd like to know what, exactly, their equations are doing. I believe the current EFFR rate is 0.83, it should show up on the New York Fed site for 5/5's value. (Otherwise I'm just confused and need to figure out when the fed's target rates go into effect. Pretty sure it's the day after the announcement, which was 5/4.) There are also Eurodollar contracts, but I didn't investigate those. I don't know how they differ or what they're suppose to be used for. Perhaps one of you does?
The Calcs
So, anyway, what could the June ZQ contracts be worth at end of June given two scenarios? (Remember: FOMC meeting is June 15)
+50 bips: EFFR that goes from 0.83 for 15 days to 1.33 for 15 days. 100 - (0.83 x 15 + 1.33 x 15)/30 = 98.920
+75 bips: EFFR that goes from 0.83 for 15 days to 1.58 (+0.75) for 15 days. 100 - (0.83 x 15 + 1.58 x 15)/30 = 98.795
The current price is: 98.880. My first reaction is: how the fuck does this indicate an 87.1% chance of +75 bips happening when the expected value is so much closer to the +50 bips result? Case 1 is only 0.04 above, while Case 2 is 0.085 below. Seems like the market thinks it'll be closer to case 1 than case 2. So where the hell is this 87.1% chance of +75 bips coming from? Working backwards -- to get a result of 98.880, the new rate would need to be 1.41, or +58 bips. Hardly a big difference from 50 bips. I honestly don't know how this implies 87.1% of +75 bips, and the math they use for the probabilities (linked above) makes no sense to me.
Worth the Gamble?
But, anyway... if I bet on +50 bips I'd go long on a contract, and it's 4170 units. Each contract requires about $615 in collateral (they call it margin, I call it collateral). So here are the outcomes per contract: If result is +50 bips: 4170 x (98.920 - 98.880) = $166.80 / $615 = 27.1% gain If result is +75 bips: 4170 x (98.795 - 98.880) = -$354.45 / $615 = -42.3% loss CAUTION: These calculations might be wrong. They're my first stab at it, and I might be missing something. Please let me know if I messed up! DO NOT MAKE INVESTMENT DECISIONS FROM THESE CALCS.
JPows Transcript
For those interested, here's the relevant part of the transcript from 5/4. There's no real promise of "only" 50 bips. It's "we're not actively discussing over 50 right now"... and it sounds like that could change based on incoming data.
STEVE LIESMAN. Steve Liesman, CNBC. Thanks for taking my question, Mr. Chairman. You talked about using 50 basis point rate hikes or the possibility of them in coming meetings. Might there be something larger than 50? Is 75 or a percentage point possible? And perhaps you could walk us through your calibration? Why one month should or one meeting should we expect a 50? Why something bigger? Why something smaller? What is the reasoning for the level of the amount of tightening? Thank you. CHAIR POWELL. Sure. So 75 basis point increase is not something the committee is actively considering. What we are doing is we raised 50 basis points today. And we said that, again, assuming that economic and financial conditions evolve in ways that are consistent with our expectations, there's a broad sense on the committee that additional 50 basis increases should be on, 50 basis points should be on the table for the next couple of meetings. So we're going to make those decisions at the meetings, of course, and we'll be paying close attention to the incoming data and the evolving outlook, as well as to financial conditions. And finally, of course, we will be communicating to the public about what our expectations will be as they evolve. So the test is really just as I laid it out, economic and financial conditions evolving broadly in line with expectations. And, you know, I think expectations are that we'll start to see inflation, you know, flattening out. And not necessarily declining it but we'll see more evidence. We've seen some evidence that core PCE inflation is perhaps either reaching a peak or flattening out. We want to know, we'll want to know more than just some evidence. We'll want to really feel like we're making some progress there. And but I mean, I -- we're going to make these decisions, and there'll be a lot more information. I just think we want to see that information as we get there. It's a very difficult environment to try to give forward guidance, 60, 90 days in advance. There are so many things that can happen in the economy and around the world. So, you know, we're leaving ourselves room to look at the data and make a decision as we get there.
I read this as: 50 bips if the inflation results appear to be flattening out as expected, but otherwise they are leaving room. In other words, not a hard promise. So, yeah.. might not be taking this bet.
Previous Results
Just for kicks, I looked at May ZQ price action on 5/4. It went up from 99.2075 to 99.2300, which is about $93.825 per contract gain. Volume was pretty big (about 200k), but not nearly as massive as I would have expected.
Fed Funds Futures - CFA Level 3: Swaps, Forwards, and Futures Strategies
Can someone explain why large financial and banking institutions buy fed funds futures as part of end of month activity? I get how this drives down the FFE rate but don't get the intuition behind the purchases.
15 month and 6 month fed funds futures curve inverting. I took some risk off the table today as the fed funds curve is starting to invert. This essentially means the really smart people are starting to price in a rate cut and a lower terminal rate. I want to enjoy the 4th weekend and want to digest this later. For context here is the same curve during last hiking cycle where the terminal rate was reached in 2018. Notice the white and magenta lines never invert until the very end of the tightening cycle. Also notice that in 2018 we were much closer to the EFFR when we inverted. I'm honestly not sure what to make of this right now, but I think it involves the "pain" that Powell was talking about at the ECB forum. If you haven't watched it I would highly recommend it. Last hiking cycle. In that spirit, I took profit on my long vol position $+130/contract. I also covered my 320 short puts at a loss (-250/contract). My goal is to get assigned on these puts, so I will redeploy them when vol spikes again. I'm not sure what strike I will target. What do you make of the current shit show? How are you positioned? Stay Liquid my friends, -Chris
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High inflation prints and the fed funds futures rate declines?
CPI came in hot as expected at 8.5% and PPI came above consensus at 11.2%. Yet the fed funds curve is predicting lower rates toward the end of the year on this news? Fed funds futures curve for all remaining FOMC meetings this year We still expect the 50bp increase in may, but are they suggesting that inflation will do the Fed's work for them? -Chris
the market now sees an 18% probability that the Fed will raise rates by 75 basis points, Fed funds rate futures show that the Fed is most likely to raise rates by 50 basis points in June, July, September and November, respectively, and by 25 basis points in December.
Macro: Renewed talk of a fed “pivot” this morning or slowing of future increases has sparked a rally. This could be an opportunity for long only funds to jump in and try to salvage returns before end of year.
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What Raging Forex Volatility Tells Us About Friday’s Stock Market Plunge
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