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Federal Reserve Uncertainty Heightens as Markets Price Blackout Period
Confirmed
In Short: Market uncertainty around the Federal Reserve's September meeting remains high, with pricing indicating unusually large deviations from past outcomes.
TD Securities' Molly Brooks analyzes the US rates markets, highlighting unusually high uncertainty around the September Federal Reserve meeting, with pricing indicating historically large deviations from past outcomes. The uncertainty is particularly driven by the pivotal August CPI report, which is expected to significantly impact rates and determine whether investors should fade current pricing or pay for a hike.
FXStreet Insights Team notes that while market uncertainty around the Fed's action in September remains high, the highest under and over shooting of pricing is around 7 basis points (bp), while for a 25bp hike, the range is +/-9bp. Friday's August CPI will likely move markets, providing an opportunity to fade the pricing or pay the meeting depending on investors' views on the inflation print.
The largest underpricing was in December 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. However, geopolitical risks and Fed rate hike bets could support the USD and the currency pair ahead of the release of US inflation figures later this week.
FXStreet's analysis further suggests that while we tend not to see large repricings during blackout period weeks, the August CPI is likely to move markets. 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.
What's confirmed
- TD Securities’ Molly Brooks analyzes how US rates markets are pricing the September Federal Reserve meeting, highlighting unusually high uncertainty around a potential hold or 25bp hike.
- Know more. ) The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts.
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- She notes that pricing going into blackout implies historically large deviations versus past outcomes, and argues that Friday’s August CPI will likely drive a significant repricing in rates and determine whether investors should fade current pricing or pay for a hike.
- While we tend to not see large repricings during blackout period weeks, CPI is likely to move markets, providing an opportunity to fade the pricing or pay the meeting depending on investors' views on the inflation print." "Market uncertainty around the Fed's action in September remains high, with its stance hinging upon the pivotal August CPI report.
- 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.
What's still developing
- TD Securities notes that the Colombian Peso (COP) has been a top high-yield performer but sees its supportive mix of tight monetary and loose fiscal policy fading.
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- The decision follows a period of heightened volatility around market closing, with traders reporting instances where prices moved sharply during the CAS and closing prices differed between exchanges.