Market prices 60% chance of September Fed hike

CME FedWatch showed on August 6 that interest-rate traders were assigning roughly a 60% chance to a 0.25 percentage-point Federal Reserve rate hike at the September meeting, according to pricing derived from 30-day Fed Funds futures. CME says the tool tracks the probability of changes to the federal target rate implied by futures markets, and asks media to attribute those probabilities to “CME FedWatch.” That pricing left markets focused on whether the Fed’s next move will be another hold or a renewed tightening step. MarketWise reported this week that futures also implied more than a one-in-three chance that rates would rise by at least 0.50 percentage point in total by December. The shift matters because FedWatch is not a policy forecast from the central bank. (cmegroup.com) CME says the probabilities reflect trading activity in the Fed Funds futures contract tied to each meeting date, and the tool compares current pricing with one day, one week and one month earlier. ### Why are traders talking about a September hike again? (cmegroup.com) August 5 pricing cited by VT Markets showed how quickly expectations were moving. VT Markets said the CME FedWatch Tool implied a 56% chance of a September hike, down from 67% the prior day, after weaker U.S. data and lower crude prices reduced expectations for further tightening. (cmegroup.com) ADP private employment increased by 44,000 in July, below a 70,000 forecast and slower than June’s 98,000, VT Markets said. ISM Services PMI rose to 54.1 from 54.0 but missed a 54.5 consensus, the firm added. ### What exactly does CME FedWatch measure? CME Group says FedWatch calculates the likelihood of different target-rate outcomes for each scheduled Federal Open Market Committee meeting using 30-day Fed Funds futures prices. (vtmarkets.com) The current tab shows the probabilities for a selected meeting date, while comparison views show how those odds stood one day, one week and one month earlier. CME also says the tool provides historical probability data going back a year for the selected meeting. That makes the headline percentage a snapshot of market pricing, not a statement of Fed intent. ### Why did softer data and cheaper oil pull the odds lower? VT Markets linked the drop in September hike odds to two factors: weaker U.S. labor data and falling oil prices. (cmegroup.com) The firm said cheaper crude eased inflation risks, while the ADP miss reduced pressure for the Fed to tighten immediately. Oil was under pressure on reports that the United States, Iran and Oman were close to an interim agreement that could reopen the Strait of Hormuz, VT Markets said. Lower energy prices can feed into a softer inflation outlook, which in turn can temper expectations for rate increases. (vtmarkets.com) ### Why do the numbers differ across outlets? August 6 coverage showed that the broad direction was similar even when the exact percentages differed. MarketWise put September hike odds at about 60%, while VT Markets cited 56% on August 5 after the latest data, indicating that the market was still repricing from day to day. (vtmarkets.com) CME’s methodology helps explain the variation. Because the tool updates with futures-market trading, the implied probability can change as economic releases, oil prices and Treasury yields move through the day. ### What is the next data point traders are watching? Friday’s U.S. nonfarm payrolls report is the next scheduled event that traders cited as a likely driver of September pricing. (vtmarkets.com) VT Markets said attention had turned to that release after the ADP figures, and said the payrolls data could trigger another repricing in Fed hike odds. (cmegroup.com) The September FOMC meeting is the next formal milestone in the rate path. CME FedWatch says the next meeting is now weeks away, leaving markets to reset expectations as each labor, inflation and energy-price data point arrives. (cmegroup.com) (vtmarkets.com)