In August, the United States added fewer non-farm jobs than expected. Federal Reserve official Bullard, one of the most influential officials, said that it is crucial to start cutting interest rates in September and has an open attitude towards the magnitude and speed of the rate cut. "New Federal Reserve News Agency" interpreted Bullard's speech as indicating his inclination to support an initial 25 basis point rate cut.
This Friday, there will be a heavyweight non-farm payroll report, followed by a speech from Fed's senior official Woller, whose influence ranks at the forefront. Investors' bets on Fed rate cuts have been repeatedly overturned, and the trading volume of related futures contracts has reached a record high.
Bloomberg data compilation shows that as of 1:00 AM Beijing time on Friday, September 6th, the second-tier contract of the most actively traded U.S. federal fund futures reached a trading volume of 0.9 million shares, setting a new single-day record for any contract since the appearance of this trading category in 1988. The trading volume of the October contract also reached a record high, surpassing the historical peak set in March 2023, the month when the collapse of Silicon Valley banks shook the financial market.
The surge in trading volume of the federal fund futures on Friday was driven by two major factors. First, it was the pre-market release of the U.S. August non-farm payroll report.
The report shows that the number of new non-farm jobs in August was 0.142 million, an acceleration from July, but still lower than the Wall Street's expected increase of 0.165 million. The total number of employment in June and July was revised down by 0.086 million. The unemployment rate in August fell after rising for four consecutive months, dropping from 4.3% in July to 4.2%, in line with expectations. According to a Wall Street article, the report data has increased the operational space for a larger rate cut by the Fed in September. The probability of a 50 basis point rate cut expected by the market rose to 50% at one point.
Then, in the early trading session of the U.S. stock market, the Federal Reserve Board member Woller, who has permanent voting rights at the FOMC meetings, called for rate cuts.
Woller believes that it is crucial for the Fed to start cutting rates in September as the risk of a further weakening in the labor market rises. He maintains an open attitude towards the scale and speed of the rate cut. Under appropriate circumstances, there may even be a larger rate cut. Woller said that if necessary, he will advocate for an aggressive rate cut at the beginning. In other words, he does not rule out the possibility of a relatively larger rate cut from the outset. However, Woller did not promise a 50 basis point cut at the FOMC meeting in September. He does not believe that the U.S. has already entered or will enter an economic recession, saying that a series of rate cuts would be appropriate.
The so-called 'New Fed Communication Agency', journalist Nick Timiraos, subsequently commented on Woller's speech, stating that he did not explicitly mention 25 or 50 basis points, but he tends to support a 25 basis point rate cut at the beginning, and explicitly retains the option to 'consultationally' accelerate the pace of rate cuts when 'new data' shows further deterioration in the economy. Timiraos emphasized several 'if' statements in Woller's speech, with Wall Street news adding annotations in square brackets.
If the data shows the need for a larger rate cut, I would also support it. In 2022, when inflation accelerated, I was a strong supporter of raising interest rates at the front end. If appropriate, I would also support such a rate cut.
These decisions will be determined by new data (probably excluding today's non-farm payroll data [this Friday]).
I expect these rate cuts to be carried out cautiously while the economy and employment continue to grow. However, against the backdrop of stable inflation, I am ready to take action quickly as needed to support the economy.
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Bloomberg pointed out that on Friday, the trading volume of federal fund futures surged along with significant price fluctuations. The trading range for futures contracts was 15 basis points, with a high of 95.12 and a low of 94.97. The increase in trading volume seems to be attributed to the unwinding of long positions targeting a 50 basis point rate cut at the September FOMC meeting, although the directional bias for the day appears to be a mixed bag of buying and selling.
The flow of funds in the federal fund futures on Friday included several large sell-offs. Among them, before Powell's speech, at 10:04 a.m. Eastern Time, 0.012 million contracts were sold at a price of 95.025, and after his speech, at 11:04 a.m. Eastern Time, 0.025 million contracts were sold at a price of 95.050. At 11:32 a.m., 0.02 million contracts were sold at a price of 94.98.
Editor/Emily