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Federal Reserve: Market mispricing risk into blackout
Developing
In Short: Market experts warn of significant repricing in rates based on Friday's CPI report, highlighting unusually high uncertainty around the September Federal Reserve meeting.
TD Securities' Molly Brooks analyzes the US rates markets, noting unusually high uncertainty around the September Federal Reserve meeting, with unusually large deviations from past outcomes, according to FXStreet Insights Team.
The Oil market, particularly diesel, is sending a different message compared to a few months ago, indicating potential volatility in the energy sector.
FXStreet notes that while large repricings during blackout periods are uncommon, the August CPI is expected to move markets, providing an opportunity for investors to either fade the current pricing or pay for a hike depending on their views on inflation.
What's still developing
- Know more. ) The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts.
- While we have discussed Warsh's Fed being more likely to be mispriced the day before the meeting as forward guidance subsides, we investigate historical pricing during Fed's blackout periods." "In meetings that the Fed holds, the highest under and over shooting of pricing is around 7bp, while for a 25bp hike, the range is +/-9bp.
- Friday's pricing would lead to a 15bp deviation for a hold and a 10bp deviation for a hike, signaling the highest uncertainty in both scenarios." "In other words, in every other scenario where we priced at least 16bp going into blackout period, the Fed hiked.
- The largest underpricing was in Dec 2018, where the Fed hiked but markets viewed the move as a dovish hike." "If the Fed does indeed hike, this is likely the lowest cost of paying the meeting that it will be.
Sources
- FXStreetlink