The CME FedWatch tool shows 90.2% of Fed funds bettors expect a 25 bp rate cut at the November meeting

Outlook

The CME FedWatch tool shows 90.2% of Fed funds bettors expect a 25 bp rate cut at the Nov meeting, now 20 days away. Given the data evidence yesterday of a robust, resilient economy, we wonder if this is not overly optimistic and a whole lot of wishful thinking. A delay should start getting priced in any day now. This is decidedly dollar-friendly.

The fly in the ointment, or rather the dragon, is the idea of Trump winning the presidential election. Polls and betting indicate he has taken the lead, which we don’t believe for a minute. See the tidbit below.

Geopolitical: The seeming retreat in risk assessment came despite the US deploying stealth bombers against the Houthies on Wednesday—the first-ever US attack on Yemen and a bid to show enemies that you can bury weapons undergound but we can still destroy them. In the old days, this would be perceived as provoking war without declaring it. Or is this akin to the Cuban missile crisis? Plus ça change, plus c'est la même chose.

Several meanings spring to mind. First, the president had to have approved it. Secondly, is it not overkill? The Yemenis don’t have indoor plumbing and running water, even if they are sheltering radicals with the capability of disrupting sea trade. That brings up their sponsor—Iran. So, this is a proxy was between the US and Iran.  In the Cuban missile crisis, Russia backed down. Not backing down would have meant firing on the US ships blockading Cuba, making them the aggressor that they already were by placing nukes 90 miles off the US coast. Iran should back down—you would back down, too, if you saw those stealth bombers, which look like something out of a sci-fi movie. But iconoclasts are die-hard and backing down is not in their playbook.

Then came the news that the 4th Hamas leader Sinwar was killed, and this one the big one, and a cruel, ugly SOB. It’s not clear any top leaders are left and American TV was all Hamas/Israel, all day. Every major headline is about this story. The US rushed in to say now is the time to get a ceasefire and the hostages back, but Israel says the war is not over yet. There is no end in sight. The US and the West want a two-state solution. Israel refuses. The ray of light is Netanyahu telling the Palestinians he feels sorry for their suffering and it will end if they reject Hamas. It’s not clear how they can let him know they are doing that. Be scared.

Forecast

The dollar is tracking the 10-year higher. Factors behind the yield gain include looming US deficits no matter who gets elected, sticky inflation that can hold the Fed back, and better-than-expected growth that can hold the Fed back. We wonder if that rate cut in November is not as certain as the betting market thinks. These factors plus geopolitical issues are strong dollar support, and any pullback will likely be just normal profit-taking and Big Bank re-positioning. 

Political Tidbit: Trump keeps showing himself unfit for office with every appearance, but polls and betting markets indicate his lead is solid. The WSJ reports Trump supporters are rigging the betting market with massive $30 million bets. PredictIt has Trump to win at 56 cents to Harris 47 cents. This is pure market manipulation and not to be taken seriously. 

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