NEWS AND ANALYSIS

Incisive market commentary from David Morrison

Stay ahead with our market commentary and webinars from our in house market strategist

Open a Live AccountOpen a Demo Account
 
+ Show blog menu

Categories

Menu

Expand 2017 <span class='blogcount'>(347)</span>2017 (347)
Collapse 2016 <span class='blogcount'>(483)</span>2016 (483)
Expand December <span class='blogcount'>(23)</span>December (23)
Expand November <span class='blogcount'>(41)</span>November (41)
Expand October <span class='blogcount'>(37)</span>October (37)
Expand September <span class='blogcount'>(41)</span>September (41)
Expand August <span class='blogcount'>(52)</span>August (52)
Expand July <span class='blogcount'>(38)</span>July (38)
Expand June <span class='blogcount'>(42)</span>June (42)
Collapse May <span class='blogcount'>(42)</span>May (42)
PM Bulletin: BOJ and the yen
31 May 2016
AM Bulletin: Quiet start following holiday weekend
31 May 2016
PM Bulletin: Meanwhile in China
27 May 2016
AM Bulletin: Yellen in focus ahead of holiday weekend
27 May 2016
PM Bulletin: FTSE breaks above 6,200 again
26 May 2016
Holiday Schedule: Memorial Day 30th May 2016
26 May 2016
AM Bulletin: Brent crude tops $50
26 May 2016
PM Bulletin : Crude Chart
25 May 2016
AM Bulletin: “Risk-on” trade continues
25 May 2016
PM Bulletin: Another poll boost for sterling
24 May 2016
AM Bulletin: Equities slip as rate hike worries persist
24 May 2016
PM Bulletin: Changing expectations
23 May 2016
Weekly Bulletin: I’ll see your hike and raise you two
23 May 2016
PM Bulletin : Significant events ahead of June FOMC
20 May 2016
AM Bulletin: Preparing for a summer rate hike
20 May 2016
PM Bulletin : Gold struggles as dollar strengthens
19 May 2016
AM Bulletin: FOMC more hawkish than anticipated
19 May 2016
PM Bulletin : FOMC minutes and the S&P
18 May 2016
AM Bulletin: FOMC minutes in focus
18 May 2016
PM Bulletin: Cable rallies on latest poll
17 May 2016
AM Bulletin: US equities lead bounce-back
17 May 2016
Weekly Bulletin : Waiting on Central Banks
13 May 2016
PM Bulletin : Apple
13 May 2016
Holiday Schedule Whit Monday Market Holiday
13 May 2016
AM Bulletin : US Retail Sales in focus
13 May 2016
PM Bulletin : Silver and Gold
12 May 2016
AM Bulletin: Investors wary after Wall Street sell-off
12 May 2016
PM Bulletin: Two headaches for Elon Musk
11 May 2016
AM Bulletin: Stock indices pull back after rally
11 May 2016
PM Bulletin: Yen pulls back on jawboning
10 May 2016
AM Bulletin: Markets steady on commodity bounce
10 May 2016
PM Bulletin: Precious metals give back recent gains
09 May 2016
Weekly Bulletin: Poor Non-Farm Payroll causes concern
09 May 2016
May: Non Farm Payrolls Out Today
06 May 2016
PM Bulletin: A dismal Non-Farm Payroll number
06 May 2016
AM Bulletin: Non-Farm Payrolls in focus
06 May 2016
PM Bulletin: Non-Farm Payroll look-ahead
05 May 2016
AM Bulletin: Crude bounce lifts equities
05 May 2016
PM Bulletin: Apple update
04 May 2016
AM Bulletin: Equities under pressure
04 May 2016
PM Bulletin: Aussie dollar slumps
03 May 2016
AM Bulletin: RBA cuts by 25 basis points
03 May 2016
Expand April <span class='blogcount'>(45)</span>April (45)
Expand March <span class='blogcount'>(41)</span>March (41)
Expand February <span class='blogcount'>(42)</span>February (42)
Expand January <span class='blogcount'>(39)</span>January (39)
 
 
 Monday 23 May 2016

PM Bulletin: Changing expectations

 

 
Members of the US Federal Reserve have gone out of their way to keep live the prospect of a summer rate hike. Note here that I’ve said “summer” rather than June. Generally speaking, it is the big quarterly meetings that are the focus for rate hike speculation, primarily because this is when the FOMC also updates its Summary of Economic Projections and the Fed Chairman holds a subsequent press conference. However, the July meeting is now also in play. This is thanks to the UK referendum on leaving or staying in the European Union which takes place on 23rd June. It would be too easy for analysts to write off a June rate rise on concerns of a win for the “leave” campaign. So the Fed is keeping its options open (and the market guessing) by hinting that it could delay a decision until July. The charts below indicate how expectations of a summer rate hike changed last week. This is where investors actually put their money at risk when they predict where the headline Fed Funds rate will be for a particular month. First up is the Fed Funds futures contract for June 2016. The second chart is Fed Funds for July 2016. As we can see, the two contracts dipped on Tuesday 17th May when San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart both said that rates could be hiked two or three times this year. There was a bigger lurch down (that is to say that the projected Fed Funds rate rose) the following day following the release of the minutes from the FOMC’s April meeting.
 
PM Bulletin

As a rough explanation of how this contract works, the implied Fed Funds rate is calculated by subtracting the contract value from 100. So for June the implied rate is 0.42% (100 – 99.58). Now, the current Fed Funds fluctuates in a band between 0.25% and 0.50% (it was 0% to 0.25% prior to the December rate hike). So, the current mid-point is 0.375% which means 0.42% is pricing in the possibility of a hike. Investors now see a 28% chance of a June rate hike, while the chances of a July increase have climbed to 48%. To put this in some kind of perspective, before the release of the minutes the probability of a June hike was put at 14% and July’s 31%.

PM Bulletin

So it’s fair to say that investors still aren’t convinced that the Fed will hike next month, but they’re certainly hedging their bets. They will be paying close attention to speeches and comments from members of the US central bank in the coming fortnight – before a period of purdah is imposed. Over the weekend the Federal Reserve Bank of Boston President Eric Rosengren told the Financial Times that he’s ready to back a rate increase. Earlier today St. Louis Fed President James Bullard compared the FOMC’s predictions for a “slow normalisation” of monetary policy with the market’s forecast of “almost no normalisation.” Helpfully, he concluded that both views, considering different economic numbers, “may be more normally correct.”

There are plenty of other Fed members talking this week. But investors will focus on Fed Chairman Janet Yellen who is due to speak on Friday evening at Harvard University.


 Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


Add a comment Add comment            

 

 
© 2017 Spread Co Limited. All Rights Reserved.

Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

Spread betting and CFD trading are leveraged products and can result in losses that exceed your deposits. Ensure you understand the risks.

Losses can exceed deposits. Click here to learn more.