Fed-funds futures traders have shown a significant shift in their expectations regarding rate cuts. According to the CME FedWatch Tool, the probability of a 25 basis point rate cut next month has risen from just shy of 60% on Thursday to roughly 70%. This indicates a growing belief among traders that the Federal Reserve may take action to stimulate the economy.

Greg Wilensky's Perspective

Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, argues that the current probability of a rate cut is still too low. In an email, he stated, "We still believe that a 25-basis point reduction to the policy rate is extremely likely. The odds of a cut are still higher than the 70% currently implied in the futures market." Wilensky believes that a combination of a very strong NFP (nonfarm payrolls) print and a higher than expected core CPI release is needed to cause a pause at the December meeting. 1: Wilensky's analysis is based on his in-depth understanding of the economic landscape. He closely monitors various economic indicators and believes that the current data does not fully reflect the need for a rate cut. His expertise in fixed income markets gives him valuable insights into the potential impact of rate changes on different asset classes. 2: By emphasizing the importance of specific economic data points, Wilensky is highlighting the complexity of forecasting policy rates. The interaction between different economic factors makes it difficult to predict with certainty the direction of interest rates. However, his view suggests that there is still a significant chance of further rate cuts in the near future.

The Difficulty in Forecasting Policy Rates

Wilensky also pointed out that the path for policy rates over the next year is more challenging to predict. The economy and markets will be influenced by governmental policy decisions not only in the U.S. but also around the world. These external factors add an additional layer of uncertainty to the already complex task of forecasting interest rates. 1: The global nature of the economy means that events in one country can have ripple effects on others. For example, changes in trade policies or geopolitical tensions can impact economic growth and inflation, which in turn affect interest rate decisions. Wilensky's recognition of this global interdependence is crucial in understanding the potential trajectory of policy rates. 2: Additionally, internal factors such as domestic fiscal policies and consumer sentiment also play a significant role in shaping the economic outlook. Wilensky's expertise allows him to consider these various factors and provide a more comprehensive analysis of the future path of policy rates.

The Market's Pricing and Treasury Curve Outlook

With the market pricing in a little less than 75 basis points of easing by the Fed over the next year, Wilensky believes that the odds favor more cuts. This has a positive impact on the short to intermediate part of the U.S. Treasury curve. 1: The pricing of interest rate futures reflects the market's expectations and sentiment. A lower probability of a rate hike and a higher probability of a rate cut can lead to a flattening or even an inversion of the Treasury curve. Wilensky's view suggests that the market is anticipating a more accommodative monetary policy in the coming months. 2: The implications of a more dovish monetary policy for the Treasury market are significant. Lower interest rates can stimulate borrowing and investment, which can have a positive impact on economic growth. However, it also poses challenges for fixed income investors who rely on higher yields. Wilensky's analysis helps investors navigate these complex market dynamics.