The dovish outlook on the Federal Reserve increased after the NFP report, with some pricing in the possibility of a 50 basis point cut in September. By year-end, a 70 basis point reduction for the Fed has a 91% probability of a rate cut at the upcoming meeting. The European Central Bank shows an 8 basis point cut expectation, with a 99% probability of no change at the next meeting.
The Bank of England shows a 12 basis point reduction, with a 98% probability of no change at the upcoming meeting. Meanwhile, the Bank of Canada sees a larger expected reduction of 42 basis points, with an 89% likelihood of a cut at the next meeting. The Reserve Bank of Australia has a 30 basis point reduction expectation, with an 81% probability of no change.
Reserve Bank Of New Zealand Expectations
The Reserve Bank of New Zealand is predicted to cut by 38 basis points, with a 91% chance of a cut at the next meeting. The Swiss National Bank shows a mild 7 basis point cut expectation, with a 91% probability of no change. Lastly, the Bank of Japan is unlikely to change, with a 12 basis point hike expected but a 97% probability of no adjustment.
Following the soft US jobs report last Friday, where we saw only 125,000 jobs added against expectations of 180,000, expectations for aggressive rate cuts have surged. The market is now fully pricing in a rate cut at the September 17th Fed meeting. This shift was also driven by weaker-than-expected wage growth, which came in at just 0.2%.
We see traders now positioning for a total of 70 basis points in cuts by the end of the year, implying three 25 basis point reductions. However, some are betting on a more aggressive “insurance cut” of 50 basis points this month, much like the policy adjustment we saw back in 2024. The odds for such a large cut have jumped to around 9% according to futures markets.
Major Focus On Us CPI Inflation Report
The major focus this week is the US CPI inflation report due on Thursday, September 11th. A soft inflation reading would likely give the Federal Reserve the conviction to deliver that larger 50 basis point cut. Consequently, options on interest rate futures are seeing increased activity as traders position for a significant market move.
It is not just about the Fed, as Canada’s job market showed an even bigger miss by losing 10,000 jobs unexpectedly. This has cemented expectations for a second rate cut from the Bank of Canada, with 42 basis points of cuts now priced in by year-end. This growing policy divergence could create opportunities in currency pairs like the USD/CAD.
With the debate between a 25 or 50 basis point cut, we should expect short-term volatility to increase in bond and currency markets. Traders can use options to position for this, with strategies like straddles on treasury futures becoming more attractive ahead of Thursday’s data. The VIX, currently sitting around 17, is also likely to see upward pressure this week.
