With the continuous rise of market expectations for a rate cut in September by the Federal Reserve, is it possible for the Federal Reserve to take the lead by launching a rate cut at the July interest rate meeting at the end of next month?

Although from the current market expectations, this possibility is extremely limited: the Chicago Mercantile Exchange's Federal Reserve observation tool shows that the probability of a rate cut by the Federal Reserve next month is only 12.4%.

However, in the past week, two large bets in the federal funds futures market have attracted Wall Street's attention - these two bets are predicting a rate cut in July very boldly, which is completely opposite to the market's current expectations of the timing of rate cuts.

So far, these positions are all concentrated in the August federal funds futures contract. This contract will expire on August 30th, so it can reflect the information of the July 31 policy decision without being affected by the results of the September meeting.

Among them, a transaction on Tuesday before the U.S. June holiday (Wednesday) caused new risks to the Thursday market.

The buyer of this transaction purchased 55,000 interest rate futures contracts, and a one basis point change in interest rates can affect a profit and loss change of 2.3 million U.S. dollars. This means that as long as the market's probability expectation of a rate cut by the Federal Reserve in July changes from zero to a fifty-fifty chance (including a 12.5 basis point rate cut), this leverage position will earn about 28 million U.S. dollars in profits.

There was a similar large transaction last week, and a one basis point change in interest rates can affect a profit of 1.25 million U.S. dollars.

Like many other markets, interest rate futures trading is anonymous, so it is difficult to determine the buyer's identity. But currently, one phenomenon worth noting is that the total amount of open interest in the August federal funds futures contract is far higher than 400,000 contracts, reaching a historical high. This to some extent indicates that although the hope of a rate cut in July seems almost zero in many people's eyes, at least some market participants are quite active in their guesses about a rate cut at that time.

So, from a time perspective, is it possible for the Federal Reserve to cut its rates in July?

It should be noted that if the Federal Reserve really makes a major decision to change, it is impossible not to inform the market in advance...

In this regard, some insiders expressed that Federal Reserve Chairman Powell will deliver testimonial speeches at a Senate subcommittee meeting in the United States on July 9th, which may be one of the catalysts for a change in the market's interest rate expectations. The testimony will be held in the week after the release of the non-farm employment report in June and two days before the announcement of the June Consumer Price Index.

In recent weeks, traders have been fine-tuning their views on the Federal Reserve's policy path and trying to find clues from economic data reports and policy maker speeches. The pricing of the interest rate market shows that industry traders have fully priced in two rate cuts by the Federal Reserve this year, while the interest rate dot plot released by the Federal Reserve in June only expects interest rate cuts once this year.

In any case, for the market's expectation of a rate cut by the Federal Reserve to continue increasing, it is obviously necessary for U.S. economic and inflation data to show more downward momentum. Of course, at least for now, this momentum is indeed converging.

As shown in the figure below, a set of U.S. economic surprise indicators compiled by Bloomberg has reached its lowest level in five years. This indicator measures the difference between the actual performance and expectations of U.S. economic data.

Several sets of U.S. economic data released on Thursday performed poorly overall: the number of initial jobless claims in the United States recorded 238,000 last week, higher than the expected 235,000; and on the same day, the number of new housing starts in the United States in May fell by 5.5%, to the lowest level in four years, with new housing starts falling from 1.35 million sets in April to 1.28 million sets.

Bart Melek, head of commodity strategy at TD Securities, said, "The market is beginning to believe more and more that the Federal Reserve will start a liberal cycle. I think we may begin to establish some long positions in the market."

In fact, from the latest situation this week, other major non-U.S. central banks around the world have already accelerated their rate cuts or are preparing to cut rates. The Bank of England kept interest rates unchanged on Thursday, but has hinted at more support for rate cuts among policymakers. The Swiss National Bank has announced a 25 basis point rate cut for two consecutive meetings. Whether the accelerated wave of global easing will also force the Federal Reserve to act earlier is also worth noting.

In the US bond market, overnight yields on various maturities of US Treasuries rebounded slightly, but the overall downturn trend in recent times has not been reversed. At the end of the New York session, the 2-year US Treasury yield rose 2.5 basis points to 4.75%, the 3-year US Treasury yield rose 3.2 basis points to 4.479%, the 5-year US Treasury yield rose 3.3 basis points to 4.283%, the 10-year US Treasury yield rose 3.8 basis points to 4.266%, and the 30-year US Treasury yield rose 4.4 basis points to 4.403%.

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