Markets are betting the Federal Reserve will take its hawkishness down a notch
Posted On August 11, 2022
Good morning. This is Jason Ma in Los Angeles filling in for Phil Rosen today. Markets have high hopes that the Federal Reserve will see the latest slowdown in inflation and ease up on its tightening cycle with a smaller rate hike.
Falling gasoline prices have played a big role in cooling inflation, but global energy markets remain volatile amid Russia’s war on Ukraine.
1. You can likely forget about another 75-basis-point rate hike from the Fed. So far this year, the central bank has increased benchmark rates four times, starting with 25 basis points, ramping up further to 50 and finally two 75 basis point bumps in June and July.
Investors are now betting that the Fed will tone it down, with the next rate hike to be 50 basis points when the FOMC meets in September. Fed funds futures show that investors think the odds of another 75 basis point hike have come down significantly.
“The market says, ‘You can tighten financial conditions in the short term. But we’re concerned that come end of this year, early next year, the economy will be in such a condition and price pressures would have eased that we think you, the Fed, will be on hold until late 2023 when you’ll end up cutting interest rates,'” Marc Chandler, managing director at Bannockburn Global Forex, told Insider.
Hopes for a less hawkish US central bank added to growing optimism for a turnaround in stocks. The bear market in stocks is almost over, according to Fundstrat’s Tom Lee, who reiterated his view that “buy the dip” is back in style. The market’s so-called fear gauge, meanwhile, fell to its lowest level since April as risk appetite among stock investors returned.
In other news:
2. US stock futures rise early Thursday, after data showed US inflation cooled sharply in July. Meanwhile, cryptocurrencies are up, with bitcoin trading above $24,500. Here are the latest market moves.
3. On the docket: Illumina, Canada Goose, and Rivian are all reporting. Plus, look out for the US Producer Price Index, expected to be released by the Bureau of Labor statistics later this morning.