Reference: https://i.imgur.com/Pl3ZfVg.jpg
Over the past week, the bond market has continued to price in a higher chance of seeing a 25bp hike at the next Fed meeting. As you can see in the screenshot, a month ago, the odds were at 35.1%, a week ago it was at 62.6%, yesterday it was at 76.7%, and today, once we received the inflation report, that number has flown to 92%.
So with that being said, even though we haven’t heard anything concrete from the Fed as to whether they’ll go for a 25 or a 50 hike, it looks like the market has made up its mind.
The risk here is obvious. If Powell does decide to go with another 50bps, then there would be a massive sell-off.
As a side note, the bond market continues to price in a fair chance of rate cuts in the later half of this year. There is only a 10% chance being priced in that the Fed rate is >5% by EOY. This is at a big contrast to what Powell has been saying which is a) No rate cuts in 2023 b) Plan to stay at 5.25% for some extended time.
In other words, the bond market doesn’t believe in what Powell is dishing out, and the market believes that Powell is bluffing.
