Good news/bad news and the Fed funds

April 30, 2015 12:35 PM

Yesterday’s market weakness has been attributed to worse that expected economic numbers, particularly the extremely disappointing 0.2% GDP growth for the first quarter. This was much worse than the expected tepid growth of 1%.

Today’s weakness may be due to positive economic numbers. Weekly jobless claims came out at a 15-year low of 262,000, the eighth straight week jobless claims came in under 300,000. Also, consumer spending increased in March by 0.4%, which was better than expected, and the Chicago PMI came out better than expected as well.

This all may be negative as it brings back the potential of a June increase in the Fed Funds rate. Not that it had been off the table outside the financial media. In fact, recent weakness has led to speculation that a rate increase may be completely off the table in 2015. This is coming from the financial wires and perhaps Fed Fund traders.

Martin McGuire wrote an interesting post today about an opportunity in Fed Fund futures. McGuire is not following the camp of folks pushing an increase into 2016, but assumes the weak economic numbers for the first quarter makes a September tightening more likely than June. The spread between September and October Fed Fund futures is extremely narrow and there may be an opportunity to anyone betting on a September rate increase. In fact, Fed Fends futures are pricing in the strongest likelihood of the first rate increase coming at the October FOMC meeting or by October. The October FOMC meeting is at the end of the month so its price will not be affected (see chart).

The Fed Fund futures are only pricing in one 25-basis-point increase for the year as the the December contract is trading at 99.64, which indicates a less than 100% chance of a rate increase by year-end

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Perhaps what traders should be concerned about as we head into May is that the market is reading both good news and bad news as bearish.  

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.