Interest rate expectations have mostly remained unchanged following recent inflation data. The Federal Reserve is expected to cut rates by 45 basis points by year-end, with a 97% chance of no change at the upcoming meeting. The European Central Bank is expected to reduce rates by 24 basis points, with a 94% probability of no change.
The Bank of England may cut rates by 51 basis points, with a 77% probability of a cut at the next meeting. The Bank of Canada is anticipated to cut rates by 16 basis points, with a 91% chance of no change. Meanwhile, the Reserve Bank of Australia is forecasted to cut by 66 basis points, with an 88% chance of a cut.
Central bank rate expectations
The Reserve Bank of New Zealand is expected to reduce rates by 33 basis points, with a 70% chance of a cut at the upcoming meeting. The Swiss National Bank is anticipated to cut by 11 basis points, with an 85% probability of no change. The Bank of Japan shows a 16 basis point hike by year-end, with a 99% probability of no change at the next meeting.
The Federal Reserve’s path appears more set, despite recent data noise. With the market pricing around 45 basis points of cuts by year-end, the recent hot Consumer Price Index was effectively neutralized by softer producer prices. This stability suggests we should consider selling near-term volatility, as the market seems to have found its equilibrium for now.
Across the Atlantic, the Bank of England is in a similar position, settling on about two cuts this year. The market quickly digested hotter inflation figures once weaker UK employment data was released, showing that wage growth is cooling. Given the high probability of a cut at the next meeting, we are looking at options strategies on the British pound that profit from a dovish turn.
Opportunities and strategies
The most actionable shift we’ve seen is with the Reserve Bank of Australia. A surprisingly weak jobs report, which saw the unemployment rate jump to a two-year high of 4.1% in January, has cemented expectations for a near-term cut. We should be positioned for this by holding long positions in Australian bond futures to capitalize on falling yields.
Meanwhile, other central banks like the European Central Bank appear to be in a holding pattern, with markets pricing in minimal action soon. We believe they will likely take their cues from larger institutions, making direct bets on their policy less attractive for now. However, the low number of cuts priced for the ECB could present an opportunity if Eurozone economic data continues to soften.
The standout is the Bank of Japan, where we are positioning for a historic policy shift away from negative interest rates. With recent major union wage deals reportedly exceeding 5%, the conditions are ripe for the first rate hike in 17 years. This makes shorting Japanese government bond futures or buying call options on the yen our highest conviction trade.
