Funds firmly in hawkish Fed camp with record bet on rates: McGeever

By Jamie McGeever

ORLANDO, Fla. (Reuters) -“Do not battle the Fed” is a well-worn market maxim, and hedge funds are sticking to it like glue.

U.S. futures markets positioning knowledge present that speculators are heeding the more and more clear alerts from Federal Reserve officers that rates of interest will probably be raised as excessive as is critical to carry inflation again below management.

The Commodity Futures Buying and selling Fee report for the week to August 23 – three days earlier than Fed Chair Jerome Powell’s Jackson Gap speech – present that funds elevated their report guess on larger rates of interest, and amassed their largest brief place in two-year Treasuries futures in over a yr.

In mild of Powell’s comparatively hawkish speech in Wyoming, which slammed Wall Avenue and pushed up the Fed’s ‘terminal charge’ market pricing implied by ‘SOFR’ rate of interest futures, it’s proving to be a successful technique.

The most recent CFTC report reveals that speculators’ web brief place in three-month SOFR futures stood at a report 1.052 million contracts within the week by Aug. 23.

That’s up from 956,971 contracts the week earlier than. The web brief place has doubled within the area of a month.

Funds additionally elevated their web brief place in two-year Treasuries to 241,143 contracts, the largest bearish guess on short-dated bonds since Might final yr.

A brief place is basically a wager that an asset’s worth will fall, and an extended place is a guess it should rise. In bonds and charges, yields fall when costs rise, and transfer up when costs fall.

JOB NOT DONE

After Powell’s speech on Friday, merchants pushed the Fed’s terminal charge implied by Secured In a single day Financing Fee futures, to be reached by March subsequent yr, above 3.80%. Early this month, the terminal charge was round 3.20% and priced for December this yr.

What’s much more putting than this rise of round 60 foundation factors is the bounce in implied charges for the top of subsequent yr. The December 2023 SOFR contract on Friday implied a fed funds charge of three.45%, 90 bps larger than the two.55% implied on Aug. 1.

Merchants’ are molding a reasonably agency ‘larger for longer’ view of the Fed, and ideas of a pivot subsequent yr are evaporating. Solely 35 bps of easing is priced in for the again finish of subsequent yr, down from 60 bps just a few weeks in the past.

Regardless that inflation seems to be cooling, Powell was clear that the Federal Market Open Committee is taking no probabilities.

“The underside line was that the FOMC’s job isn’t performed, and that it might want to comply with by with extra hikes — regardless of potential financial ache — … after which hold coverage restrictive for a time,” economists at Barclays wrote on Friday.

(The opinions expressed listed below are these of the writer, a columnist for Reuters.)

(By Jamie McGeeverEditing by Alistair Bell)