(Bloomberg) -- Lurking beyond traders’ apparently unwavering confidence that the Federal Reserve will cut rates this month is a more nebulous outlook on what the central bank does afterward.
Traders are still pricing a full quarter-point decrease in July, yet they have slowly scaled back views on how much easing takes place for all of 2019 -- pushing expectations down to 64 basis points from about 80 basis points just about two weeks ago. Yet even as the amount of easing priced in has been dialed back, eurodollar options traders have in fact, since last week, favored fading the rebound in interest rates and have been buying contracts that profit if Fed officials reduce rates beyond just their July 30-31 policy meeting.
“The market collectively thinks there’s a cut coming this month because the Fed has basically said there will be,” Kit Juckes, a strategist at Societe Generale SA, said by phone. “But to think there’s a big string of cuts coming after that you have to believe in a serious economic downturn and that’s not clear -- especially after the June labor data.”
The addition of 224,000 jobs in June, far more than economists expected, seems to make it less urgent for the Fed to take aggressive action. Dealings in eurodollar options after July 5’s jobs report show that traders have put aside views that a half a percentage point reduction by the Fed was possible this month (a quarter-point is now seen as a lock).
Traders are eyeing more guidance on the policy path this week as Fed Chairman Jerome Powell starts his two-day testimony to Congress Wednesday, the same day that minutes from the central bank’s last gathering will be released.
If Powell “makes clear that all is not well, and that he stands ready to do more, then markets might soar but real business confidence might tank,” Michael Every, Rabobank head of Asia financial markets research, wrote in a note.
Growth slowed in the second quarter, and is tracking about a 1.3% annual rate, according to the Atlanta Fed’s tracker.
Powell might strike a cautiously optimistic tone, which will possibly be a slight disappointment for doves, wrote John Herrmann at MUFG Securities in a note Tuesday. “But the economy’s more gripping risks suggest further interest rate cuts are in the offing.”
Treasury 2-year yields are steady at 1.91% on Wednesday, and are up about 22 basis points from a low in June.
(Adds Rabobank comment in sixth paragraph.)
--With assistance from Edward Bolingbroke and Ruth Carson.
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