Increase in US Interest Rate Hike Bets by Investors... "29% Probability of Hike in Options Market"

Price Increase Outlook Early This Month 26% → Now 29%
BNP Paribas, Macquarie Mention Possibility of Increase

The U.S. Federal Reserve (Fed) is increasingly being viewed as potentially raising interest rates this year rather than cutting them. While expectations for a rate cut in December are gaining traction, the persistent high inflation could lead to a rate hike, and investors betting on this scenario are also on the rise.

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According to Barclays, Europe’s largest investment bank, traders in the market for 1-day SOFR (Secured Overnight Financing Rate) options on U.S. Treasury repurchase agreements have increased their expectations for the effective December rate to rise by 0.25 percentage points to 5.56%. The probability assigned by traders to a 0.25 percentage point rate hike by the Fed this year rose from 26% at the beginning of the month to 29% as of the 29th (local time), indicating a slight increase in investors anticipating a rate hike within the year.

Analysis by BNP Paribas, France’s largest bank, also showed that the probability of the Fed raising rates by 0.25 percentage points next year reached 22%.

Australia’s Macquarie Group recently mentioned the possibility of a rate hike in a memo to investors, citing risks of rising inflation.

David Doyle, an economist on Macquarie’s North America economic team, stated, "We had expected core inflation to fall to 2?2.5% by mid-2024, but now it seems unlikely. It looks like it will only reach that range by 2025." He added, "The likelihood of the next policy move being a hike rather than a cut is increasing," and warned that "the risk of a tilt toward a more hawkish (monetary tightening) stance continues to grow."

Initially, Macquarie had expected the Fed to cut rates in December. However, with inflation showing strength, the timing for a rate cut has been pushed to next year. Nevertheless, they noted that rate cuts would only be possible once inflation reaches 2%, and they have begun to mention the possibility of rate hikes as well.

Most experts believe that unless inflation rises rapidly, the Fed is unlikely to raise rates. However, inflation has repeatedly defied expectations this year, increasing concerns about price trends and monetary policy uncertainty. Fed Chair Jerome Powell had signaled rate cuts this year as recently as December last year, and the Fed maintained a forecast of three rate cuts by March, but now those three cuts seem unlikely. The U.S. Consumer Price Index (CPI) has exceeded expert forecasts for three consecutive months this year, and the Fed’s preferred core Personal Consumption Expenditures (PCE) price index rose 2.8% year-over-year in March, surpassing the market estimate of 2.6%.

Former Fed Vice Chair Richard Clarida also said, "If the data continues to disappoint, the Fed will have to start raising rates," adding, "While rate hikes are not the base scenario, if core inflation rebounds to the 3% range, hikes become possible."

Gennady Goldberg, Head of U.S. Rates Strategy at TD Securities, analyzed, "The pricing of hikes in the interest rate futures market reflects the uncertainty investors face in an environment of strong growth and persistent inflation," and added, "The longer we stay in a high-rate, strong economy, and sticky inflation environment, the more investors will question whether the Fed’s actions are appropriate."

Meanwhile, the Fed will hold its Federal Open Market Committee (FOMC) meeting over two days starting on the 30th. It is widely expected that the Fed will maintain the benchmark interest rate at the current 5.25?5.5%, the highest level in 23 years. Market attention is focused on how hawkish Fed Chair Jerome Powell’s message will be.