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Softer PCE and payroll data cut October Fed hike odds to 20.5%
CME FedWatch puts the odds of an October Fed hike at 20.5%, down from about 51% a week ago, after softer PCE and jobs data. Traders still expect a hike by December, so the dollar now trades on when it comes.
The Investor · Invest desk
What happened
- The euro's rally followed Marine Le Pen, frontrunner in France's 2027 presidential race, raising her spending-cut target to 140 billion euros from 125 billion.
- The Fed releases minutes of its September 15-16 meeting, where it raised rates, and Christopher Waller, Neel Kashkari and Alberto Musalem speak later on Wednesday.
- Kansas City Fed President Jeff Schmid said on Tuesday the Fed still needs to raise rates further, even if higher long-term yields are weighing on parts of the economy.
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Why it matters
- exposure With 79.5% of the October outcome priced as no hike, a hawkish surprise in the minutes or speeches has more room to move rates and the dollar than a dovish one.
- contradiction Schmid's call for further hikes runs against the patience other Fed officials have urged, so Wednesday's three speakers decide which camp the October odds follow.
- constraint Tokyo cannot count on hawkish talk alone to support the yen: it slipped 0.19% to 158.43 per dollar on the day new BOJ board member Ayano Sato backed staged rate rises.
Traders took 30.5 percentage points off the odds of an October hike in a week, about three-fifths of what CME FedWatch had priced [18]. Fed officials have sounded less hawkish since last week's softer PCE and jobs reports [1]. December looks different. The same gauge puts the chance of a hike at that meeting at 84.5% [4], 64 points above October [19], and markets still expect more increases later this year and into next [5].
"There seems to be a little bit less urgency on the Fed to hike rates after the softer PCE and then the nonfarm payroll reports recently," Gavin Friend, a senior markets strategist at National Australia Bank, said on a podcast [6]. "With little forward guidance from Chair (Kevin) Warsh, markets have reacted sharply to each US data release and policymaker speech," Samara Hammoud, a currency strategist at Commonwealth Bank of Australia, said in a report [7]. Her bank expects a pause. "We expect the Fed to wait until December before hiking again," she said [8].
The dollar index has won back about a ninth of Tuesday's slide [26], and the slide itself started in Europe. The euro had its biggest gain in seven weeks as French bond yields fell [9]. Le Pen's new target is 15 billion euros, or 12%, above her original savings plan [20]. A snap election in Spain had added to the recent stress on the euro [11]. Bond yields around the world have climbed in recent weeks on worries about government finances as well as expected rate hikes [16]. On Wednesday the euro gave back 0.08% to $1.1249 [25].
The minutes come from a meeting that raised rates [2]. If they show a committee keener on back-to-back hikes than recent speeches suggest, I'd expect October odds to rebuild. Waller, Kashkari and Musalem could also take up Schmid's case for going further [12][13]. Or they could repeat the patience line and settle on December. I think the third outcome is most likely, and it is also Commonwealth Bank's forecast [8]. The counter-thesis is that the Fed does not set the dollar index this week, because Tuesday's slide came as European bond stress eased and French yields fell [22][9]. If October odds climb back above 50% after Wednesday's speeches, the softer data bought the Fed a week of patience and nothing more [3].
What to watch
- The Fed's consumer credit release, expected to show August borrowing falling to $15 billion from $18.06 billion in July, is the next data point traders can react to.
- Whether the BOJ signals this month that underlying inflation has roughly reached its 2% target, and whether the yen moves off 158.43 when it does.
- French bond yields and Spain's snap election, both of which have recently moved the euro, and with it the dollar index, independently of what Fed speakers say.