Analysts at Rabobank point out that the implied probability of a Fed rate hike in March is now zero; in May it is 2%; in June 6.9%; and by end-2019 it is just 5%.
“By contrast, the implied odds of a Fed rate cut in March is 2.9%; of a cut by June is 2.7%; and by December is 27.9%. One month ago the implied odds of a rate hike in March was 87.4% and 94% by end-2019, and the odds of a rate cut were zero! This puts our very own Philip Marey’s call of the Fed going just the once more at most and then being on hold look bang on the money – and those big Wall Street talking heads I already mentioned are looking a whole lot smaller today.”
“Yet what on earth could possibly have seen that kind of turnaround?! US data are on the whole still good: the payrolls report on Friday, even if it is a lagging indicator, was excellent. Indeed, we finally have pay picking up (perhaps). True, global growth has been looking a lot more wobbly, but since when has the Fed cared about that? It didn’t as recently as the December meeting!”
“The only credible argument that can be made are: there has been a sharp underlying turn in the US data – which is not the case; the Fed is worried about global growth – which is not the case; Trump has bullied the Fed – which might be the case; or, most likely, the Fed has revealed yet again that despite constant prattle of its inflation and employment mandates, what really matters most to it is asset prices. All it took was a series of large intra-day equity price falls and suddenly we have rate cuts priced in. In short, when the equity markets say “Jump!” the Fed always asks “How low?”
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