After June’s very hot consumer inflation report, futures market traders immediately began betting that the Federal Reserve could raise interest rates as much as 1% later this month.
The Consumer Price Index, released Wednesday morning, rose 9.1% year-on-year, the highest monthly reading for the number since November 1981. The report immediately spurred discussions on the market that the Fed might become more aggressive and that its tougher actions would even have an impact. more likely to cause a recession.
Fed funds futures for July immediately rose to 81 basis points, meaning investors were pricing in 0.81% of Fed rate hikes on July 27. from an increase in July, according to BMO. One basis point equals 0.01%.
The market had previously priced in a 0.75 percentage point rate hike, but July’s high contract reading indicates that many investors are bracing for a 1% hike. That would be extremely aggressive on top of June’s three-quarter point hike, the biggest increase since 1994. The target for the federal funds rate range is currently 1.5% to 1.75%.
Global pressure on rates is certainly one reason why expectations continued to rise on Wednesday, along with comments from a Fed official.
“You had the Bank of Canada, out of nowhere, which went from the solid expectation of 75 basis points, which was already high … and it did 100 basis points,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
Brenner said comments from Atlanta Fed President Raphael Bostic on Wednesday afternoon also helped raise expectations. Bostic said June’s scorching CPI report was a concern and everything is “at stake”.
Now traders are obsessed with every piece of inflation data, as well as comments from Fed officials. The Producer Price Index is released at 8:30 a.m. ET Thursday and is expected to rise 0.8%. Also, Fed Governor Christopher Waller speaks two and a half hours later at 11 a.m. ET.
Ben Jeffery, rates strategist at BMO, said the market now priced a federal funds rate of 2.51% in July, but October futures also pointed to a bigger rise in September. The September contract was set for the fed funds at 3.23% in October.
“It’s an additional 75 basis points,” he said.
Jeffery said Fed officials would enter a quiet period ahead of their July 26 meeting and there were few scheduled appearances on the schedule. St. Louis Fed President James Bullard speaks at a conference on the European economy Friday morning, and Bostic speaks early Friday on monetary policy.
“There is certainly a risk of unanticipated remarks from another member of the committee,” he said.
Strategists noted that the 10-year Treasury yield initially jumped on the CPI report, but fell back, reflecting worries about a recession. Yields move opposite the price.
“Rising inflation means the Fed needs to act more aggressively. The Fed acting more aggressively means recession risks are a higher probability, and a higher probability of recession drives rates lower,” he said. Brenner said.
The 10-year was at 2.91% late Wednesday, down from a high of 3.07%.