Last week was a big one for economic news, but none of it had much impact on the probabilities for federal funds rate changes over the next two Federal Open Market Committee meetings, as estimated from prices on options for federal funds futures. Twenty-five basis points tomorrow is presumed a lock:
And another twenty-five is the clear favorite for the end of the two day meeting in June:
But wait! The ever enterprising Erkin Sahinoz (keeper of the programs that generate these estimates) has finally been able to generate probabilities for October contracts, which span the August and September FOMC meetings. Going into Friday's reports -- The Prudent Investor has the complete rundown -- the betting was on one hundred additional basis points over the next four meetings. That changed on Friday, with the expectation of a pause somewhere along the line making a run for the money.
All of the generally weak news was certainly in play, but as my labeling makes clear, I'm guessing that the employment cost index report loomed large in these assessments. From FXSTREET.com:
U.S. employment costs increased 0.7% in the first quarter after a 0.8% gain in the fourth quarter, the Labor Department reported Friday. The increase in the employment cost index was the smallest increase since the first quarter of 1999 and was below market expectations. Economists were forecasting a 1.0% gain in employment costs in the first quarter, according to a survey conducted by MarketWatch. Benefit costs rose 1.2% in the quarter, the smallest increase since the first quarter of 2002, while wages and salaries rose 0.6%.
The market for the October options is still pretty thin, of course, so the estimated probabilities should probably be taken with more than the usual grains of salt. Nonetheless, it is pretty hard to reconcile the ECI data with a strengthening of underlying inflationary pressure.
Here's the data for the pictures above:
Download may_pdfs_050205.xls
Download july_pdfs_050205.xls
Download october_pdfs_050205.xls
In case you are interested, in last week's post I linked to a copy of a research paper with more detailed information on the use of options contracts in extracting these expectations.