6% is the new pain point for markets
The market is having a rethink on the path for interest rates in the aftermath of the strong non-farm payrolls and ISM services data on Friday. For starters, that means taking the FOMC dot plot at face value and a terminal rate of 5-5.25% at the June meeting. That's something the market can handle, especially if it comes with a strong economy.Where the tables turn is if rates go higher and/or stay there for longer. I think the market can tolerate 5.25-5.50% but there's a real paint point at 6% because fixed income markets would need to reprice. Ultimately, I think 6% would been seen as 600 basis points of Fed ammunition but getting there could be painful.Bloomberg today writes about fresh trades in the options and SOFR market on higher rates.On Tuesday, a trader amassed a large position in options that would make $135 million if the central bank keeps tightening until September. Buying of the same structure continued Wednesday, alongside similar bets expressed in different ways.If we get there will depend considerably on the economic data, starting with the release of January CPI on Valentine's day. If there isn't enough improvement in the price data, then the market could start to more seriously rethink the path of rates, or at least the tail risks around rates.The market is also looking for the Fed to begin cutting by year end and continuing to cut in 2024. Before the jobs data, a decline to 3.5% was priced in but that was coupled with a belief in a recession. If a recession doesn't come, then the impetus to cut is lost. This article was written by Adam Button at www.forexlive.com.
The market is having a rethink on the path for interest rates in the aftermath of the strong non-farm payrolls and ISM services data on Friday. For starters, that means taking the FOMC dot plot at face value and a terminal rate of 5-5.25% at the June meeting.
That's something the market can handle, especially if it comes with a strong economy.
Where the tables turn is if rates go higher and/or stay there for longer. I think the market can tolerate 5.25-5.50% but there's a real paint point at 6% because fixed income markets would need to reprice. Ultimately, I think 6% would been seen as 600 basis points of Fed ammunition but getting there could be painful.
Bloomberg today writes about fresh trades in the options and SOFR market on higher rates.
On Tuesday, a trader amassed a large position in options that would make $135 million if the central bank keeps tightening until September. Buying of the same structure continued Wednesday, alongside similar bets expressed in different ways.
If we get there will depend considerably on the economic data, starting with the release of January CPI on Valentine's day. If there isn't enough improvement in the price data, then the market could start to more seriously rethink the path of rates, or at least the tail risks around rates.
The market is also looking for the Fed to begin cutting by year end and continuing to cut in 2024. Before the jobs data, a decline to 3.5% was priced in but that was coupled with a belief in a recession. If a recession doesn't come, then the impetus to cut is lost.
This article was written by Adam Button at www.forexlive.com.
