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Fed Rate-Cut Bets Grazed Rather Than Maimed by U.S.-Mexico Deal

Published 06/10/2019, 02:15 PM
Updated 06/10/2019, 08:00 PM
© Reuters.  Fed Rate-Cut Bets Grazed Rather Than Maimed by U.S.-Mexico Deal

(Bloomberg) -- Bond traders expect that the Federal Reserve will start slashing interest rates within months and the trade deal between the U.S. and Mexico has barely put a dent in that view.

The August fed funds futures contract shows traders are pricing in a central-bank rate of 2.15% after policy makers’ July meeting. That’s 3 basis points higher than Friday’s closing level -- before U.S. President Donald Trump announced an accord with Mexico. But it’s still 22 basis points below the current effective fed funds rate, signaling traders see almost a 90% chance of a quarter-point reduction by the end of July.

The January contract, meanwhile, shows traders are betting on more than 60 basis points of easing by the time 2019 is over.

Friday’s weaker-than-expected U.S. jobs report added fuel to the idea that the economy is struggling enough to warrant fresh stimulus from the Fed. And while the tension between Mexico and America has eased, concern about the trade fight between the U.S. and China continues to weigh on investor confidence. All that means that traders are still betting on easing sooner rather than later, with some speculating that the first move could be a 50-basis-point cut.

Bank of America Corp (NYSE:BAC).’s Mark Cabana and Joseph Song point to the slope between one- and six-month fed funds futures as a potential sign of imminent action.

“The history of this spread back to ‘89 suggests the market has never priced an amount of inversion equal to today’s levels without the Fed cutting,” the analysts wrote. And although they see September as the most likely month for easing, they note that “the current front-end inversion suggests the Fed could be cutting in a month.”

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