There’s a pattern & predictability to tides that make them easy to forecast. But, on very long timescales, that doesn’t mean they are constant by any measure. At a celestial level, the amount of force produced depends on the mass of the objects involved, the distance, the eccentricity of the orbits, and the radius of the bodies – for starters. The push & pull that’s observed in financial markets is analogous: different assets exhibit similar ebb & flow as correlations oscillate.
I mentioned this morning that the options market was beginning to make some pretty exceptional progress on the way to pricing in 50bps+ at the September meeting. What’s even more significant, in my mind, is what the market has done to the odds of additional easing in 2019. We’re now 1 in 5 odds that the Fed delivers an additional 100bps by year-end.
Over the past month, the bond market has seesawed between paroxysmal rallies & emetic sell-offs. In between, however, an overall placid composure has taken hold: arguably due less to complacence & more to trauma as investors prepare for the next bout of volatility. While there’s little disagreement about the role that policymakers have played, what’s fascinating is the degree to which so much of the recovery in risk assets is due solely to the promise of more imminent easing, as opposed to any improving fundamental picture. It’s an addiction – and the time for intervention is long gone.
At its most extreme this morning, I’d estimate the mkt was pricing in almost 10% probability of a 25bp cut by the Fed tomorrow. How do I figure? It’s based on FFQ9 (August Fed Funds futures), which at its high of 97.885 was clearly reflecting odds of an imminent Emergency Cut. WARNING: This will involve some basic math…