Copied from a traders board on RB
Update on Federal Funds Futures
May 11, 2001:
Strong retail sales and buoyant consumer sentiment are gnawing at expectations for aggressive Fed easing.
Futures traders are scaling back easing expectations in the wake of this morning's unexpectedly strong retail sales report for April. Sales rose 0.8% in April from March, following two months of declines, and besting the consensus forecast for a 0.1% gain. Excluding autos, sales were still up a strong 0.7%, as a combination of warmer weather and higher gasoline prices helped boost revenue at the nation's retailers. While March offered an easy comparison, April's results nevertheless offer reassurance that consumer spending continues to provide fuel to the economy. The resilience in spending is weighing on anticipation for aggressive Fed easing in the coming months.
Further dampening easing expectations, according to May's preliminary reading of the Michigan consumer sentiment index, optimism about the economy appears to have rebounded, despite weaker job prospects and rising unemployment. The index showed an increase to 92.6 vs. the previous month's 88.4 level. Assessments of both present and expected conditions improved solidly, suggesting that the recent uptick in equity markets may be shoring up sentiment enough to counter the effects of increased layoffs. Futures traders expect any upward momentum in confidence to temper the Fed's motivation to slash interest rates.
Stong sales and rebounding confidence together have overshadowed this morning's release of the Producer Price Index. Wholesale prices rose a modest 0.3% in April, just below consensus estimates for a 0.4% increase. Excluding the more volatile food and energy sectors, prices were up 0.2%. While cooling price pressures leave the door open for the Fed to cut rates without fear of sparking inflation, that threat has been off the radar screen for quite some time. The futures market today is guessing that signs of strength in the economy, more than moderating inflation, will steer Fed thinking at next week's FOMC meeting, and in the months to come.
However, despite today's slew of positive economic news, traders still narrowly anticipate a 50 basis point interest rate cut at Tuesday's scheduled FOMC meeting.
The fed funds rate is expected to average 4.08% in June, which implies that barring an intermeeting cut during the month, traders anticipate at least one more rate cut to 4.25% by the end of May, and roughly a 60% chance of a 50 basis point rate cut to 4.0% by the end of May. The Fed's next scheduled meeting is May 15.
The fed funds rate is expected to average 3.93% in July, which implies that barring an intermeeting cut during the month, traders anticipate at least two more rate cuts to 4.0% by the June 26/27 FOMC meeting, and a 28% chance of a third rate cut to 3.75% by the June meeting.
The futures market predicts a 3.9% fed funds rate in September, which implies that barring an intermeeting cut during the month, traders anticipate at least two more rate cuts to 4.0% by the end of August, and a 40% chance of a third rate cut to 3.75% by the end of August.
The most likely scenario according to the futures market is now 50 basis points in additional rate cuts by the end of June. The Fed is expected to hold the fed funds rate at 4.0% during the third quarter. |
