Two Year Note Futures Fade The Fed and Fed Funds Futures

By Michael Lebowitz and Lance Roberts | October 18, 2023

Multiple Commentaries last week noted that a handful of Fed members alluded that the recent spike in long-term interest rates likely means the Fed will pause rate hikes. Despite the orchestrated message, which was repeated on Monday by Philadelphia Fed President Harker, the two year note futures and Fed Fund futures markets seem to be in disagreement. The graph on the left shows that there are now more short positions on two year notes futures than at any point in the last 30+ years. Those traders who are short two year notes are betting short-term yields will rise. In other words, they are betting on another Fed rate hike.

The Fed Funds futures market implies a 33% chance the Fed hikes this year. By March 2024, the odds favor rate cuts. When pricing two year note yields, one must consider what the Fed does at coming meetings as well as their expected stance for the next two years. Given it tends to be forward-looking, the two year not yield most often leads Fed Funds. The graph on the right shows that Fed Funds are now above the “forward-looking” two year note yield. Prior crosses, as circled, led to lower rates and recessions. Despite the Fed’s recent change in messaging, Fed Funds futures pricing, and the graph on the right side, two year note futures traders are betting on higher Fed Funds.

two year notes  fed funds futures

What To Watch Today


Economic Calendar


Earnings Calendar

Market Trading Update

The market traded sloppily again yesterday with a weak open and then buying coming in to push the markets back into positive territory. However, as we have discussed over the last few days, the market remains trapped between overhead resistance and minor support. The market will need to make a move in one direction or another here soon and either break above resistance at the 50-DMA to challenge the June highs or retest the 200-DMA. Money flows continue to be bullish, with buying overtaking attempts to sell the market down. That is a good sign for the overall market, but earnings will drive individual names. Today, as noted above, starts the parade of earnings, particularly in the smaller regional banks.

Market Trading Update

Retail Sales Are On Fire

September retail sales were much higher than expected, coming in at +0.7% monthly, well above expectations for +0.3%. The control number, which feeds GDP and other economic data, was +0.6% for September. The BEA data infers consumers continue to spend aggressively. Consequently, we will likely see upward revisions to third-quarter GDP forecasts.

While retail sales were good, there are increasing signs that consumers are starting to spend less. Credit card spending was soft in September after a weak August. Consumer confidence measures are turning lower and remain at levels that, in the past, have been recessionary. It is also worth noting retail sales data is not adjusted for inflation. As such, it can be difficult to decipher when inflation is high and volatile as it is. Lastly, as if retail spending data weren’t confusing enough, we share the tweet below courtesy of ZeroHedge. As shown, the seasonal adjustments for September were massive. Unadjusted retail sales fell over 5% from August to September.

retail sales

AI Chip Makers Stumble As Biden Further Restricts Sales To China

NVDA led the chipmakers lower as the Department of Commerce announced further restrictions on the sales of AI chips to China. The new restrictions will close loopholes in the original restrictions. The administration’s goal is to keep key AI technology out of China’s hands, especially as it relates to military-related technology. NVDA is down almost 5% on the news despite saying the restrictions will not have a material effect on short-term earnings. However, the concern is that China and the U.S. keep retaliating with increasing negative effects on chip sales.

The chart below shows that NVDA has been in a consolidating pattern over the last few months as it digests the surge in price over the last year.

nvda chip maker stock

Tweet of the Day

fed credibility

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