Technical Analysis

The Fed funds futures market is betting against the economy

Normally you would expect at least a few days of the market at least humoring Federal Reserve forecasts but not this time around.

The Fed came out and forecast year-end 2023 rates at 5.00-5.50% with just 2 of 19 forecasters below that. Yet the Fed fund futures market is pricing in a peak of just 4.89% and a year end level of 4.41%. That’s an 80 basis point difference.

That reflects a total lack of confidence in Fed forecasts.

The WSJ’s Nick Timiraos interviewed Lee Ferridge, a senior economic strategist at State Street Global Markets in his review of the FOMC.

“It’s like the new projections didn’t happen, quite honestly. And I’m
surprised the market is shrugging it off so confidently,” said
Ferridge. “The expectation is the economic data will be so poor” by the
end of the first quarter “that the Fed will stop hiking.”

That only really leaves 2.5 possible scenarios:

1) The bond market is right and the economy struggles rapidly and badly

2) The Fed is right and the forecasts follow their models and rates continue to rise

2.5) Somehow the economy holds it together and inflation crumbles rapidly enough to keep the Fed away from +5%

And I don’t think it’s just the bond market betting on the first scenario. Stocks are struggling today and there was no bad-news-is-good-news reaction in stocks to the retail sales data. The hawkish comments from the ECB are adding to the mix as well.

I expect an extreme market focus on economic data and corporate commentary coming out of the holiday period.

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