The fed fund futures seem to be disconnected from reality and in my opinion the primary driver of the markets right now.
On their last meeting the Fed signaled a target rate of 1.75-2% by end of the year so over the 6 remaining meetings an average .25 rate hike per meeting. Economists think this will be a bit higher with 2x .5 hikes and 4x .25 hikes. As of today the Fed Funds futures for June were pricing in a .5 hike then a 86% chance of a .75 hike and 14% change of a 1.00 hike. last week before the June contracts were pricing in a 9% chance of .5 and 91% chance of .75. This is an extremely rapid chance in expectations with no real fundamental basis.
Historically the Fed and economists forecasts estimate almost always too high. Seeing the erratic nonsensical movements in these prices leads me to believe the market is just trading on momentum and a very one sided trade. With the next FOMC May 4th we should hopefully see some return to reality with the fed funds rate and expectations to substantially drop regardless if they do a .25 or .5 hike. Either this meeting or next I expect a complete 180 reversal in sentiment.
On their last meeting the Fed signaled a target rate of 1.75-2% by end of the year so over the 6 remaining meetings an average .25 rate hike per meeting. Economists think this will be a bit higher with 2x .5 hikes and 4x .25 hikes. As of today the Fed Funds futures for June were pricing in a .5 hike then a 86% chance of a .75 hike and 14% change of a 1.00 hike. last week before the June contracts were pricing in a 9% chance of .5 and 91% chance of .75. This is an extremely rapid chance in expectations with no real fundamental basis.
Historically the Fed and economists forecasts estimate almost always too high. Seeing the erratic nonsensical movements in these prices leads me to believe the market is just trading on momentum and a very one sided trade. With the next FOMC May 4th we should hopefully see some return to reality with the fed funds rate and expectations to substantially drop regardless if they do a .25 or .5 hike. Either this meeting or next I expect a complete 180 reversal in sentiment.
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As expected the Fed shot down the idea of a .75 hike the next meeting which the Fed Fund Futures had priced in as a near 100% certainty. This is sentiment shift I was explaining in my post. The market flipped bullish as soon as the .75 rate hike was shot down reinforcing my hypothesis this (fed funds futures) has been the key driver of markets.