The Federal Reserve is widely expected to stand pat on interest rates when it meets this week, but market expectations for at least one rate rise this year have surged by nearly six-fold from the post-Brexit low as investors take a more bullish view of the US economy.
Worries about the UK’s vote to part ways with the EU shook markets late in June, sending the probability pinned by futures traders of a 2016 rate increase down as low as 7.7 per cent in late June, according to Bloomberg data based on federal funds futures.
However, generally upbeat data on the US economy and corporate America, coupled with a sharp rebound in equities that has sent the S&P 500 index to fresh record highs, has prompted investors to re-consider when the Fed will add to its December rate rise.
The odds of a 2016 rate increase hit a new post-Brexit high of 47.5 per cent on Monday, just two days before the Fed unveils its July policy decision. While expectations for an increase this month were only 8 per cent, the probability of a September increase were one-in-four, with November tracking at almost 30 per cent.
“…expectations are growing that the FOMC will signal a possible September hike at this week’s meeting,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI.
The rising expectations have been a boon for the US dollar, which has climbed since the June 23 Brexit vote by 4.2 per cent against the currencies of its major trading partners.
“….the dollar’s slow and steady rise reflects positioning ahead of any more positive tone to the FOMC statement,” said Kit Juckes, fixed income strategist at Societe Generale, referring to the Federal Open Market Committee, the Fed’s policy-setting board.
Economists note, however, that a raft of economic data and corporate earnings due out this week could once again roil the odds. Among the key releases will be second-quarter gross domestic product, which is forecast to show the US growth pace revved up to 2.6 per cent, from 1.1 per cent in the first three months of the year. Apple, Facebook, ExxonMobil and a slew of other bellwether groups are set to unveil their quarterly figures.