TRADERS: FED FUND FUTURES PRICE IN 87% ODDS OF AUG FED HIKE
By Alyce Andres
CHICAGO (MktNews) - Selling of Aug and Sep federal funds futures was heavy early Friday, with hedge funds among the most active reported sellers after the release of much stronger-than expected July U.S. payroll data.
Following the morning sell-off in the Aug and Sep contracts, fed funds traders at the Chicago Board of Trade said the Sep contract is now pricing in an 87% chance of a 25-basis-point tightening at the August 24 meeting of the Federal Open Market Committee.
"This payroll (report) was the kiss of death," said Wayne Citron, a local federal funds trader. July non-farm payrolls were reported rising by 310,000, well above economists' estimates. In addition, average hourly earnings, view as an inflation benchmark, were up .5%, also higher than forecast.
Many traders had predicted a July payroll above 200,000 would mean an "imminent tightening," at the August 24 meeting, added Lawrence Malato, also a local pit trader.
A third local market-maker said he believes the Fed is going into a tightening cycle similar to that of 1994. He pointed out back-month Eurodollar contracts also have witnessed heavy selling pressure, which is indicative of a either a Fed tightening cycle, or a severe downward correction in the U.S. equity markets.
The Nov fed funds contract traded down to 94.62 after the jobs data, which prices in a 50/50 probability of another 25 basis-point tightening at the October 5 FOMC meeting, Malato added.
On Thursday, amid a sharp rally in Treasury prices on worries over widening credit spreads, the Sep contract had priced in only a 62% probability of a 25-basis-point hike in rates at the August meeting.
Traders say an off-meeting move by the Fed is not assumed by current fed funds prices. The Aug contract is last trading at 94.945 and should settle near 94.93 if the Fed raises rates in August, they said. |
