Key Takeaways with Craig
Perhaps unsurprisingly, US Equity prices fluctuated prior to the FOMC announcement on interest rates at 1:00 PM Central time. Stock prices continued to fluctuate in the 30 minutes after the announcement but then rallied sharply during Chairman Powell’s comments during which he suggested that the FOMC would raise its target rate by 50 basis points at the upcoming meetings. Remember, as we published yesterday, CME’s FedWatch tool suggested that the market was anticipating a 75 basis point hike at the upcoming June meeting.
Interest Rates markets at CME reacted to the FOMC decision and Fed Chairman comments as well. This afternoon, we monitored CME’s Micro Treasury Yield prices just before and for the two hours after the FOMC announcement and statement.
The chart below uses the price of each Micro Treasury contract at 12:59 (central) (just prior to the FOMC announcement) as the baseline and looks at the price change from that level at different times after the announcement. As you can see, yields fell in the minutes after the announcement but actually rose several minutes into Fed Chairman Powell’s remarks (1:37 PM). As Chairman Powell continued to speak however, you can see that yields began to fall, particularly at the short end of the curve. By 3:00 PM Central time the curve had steepened substantially with the 2-Year falling by about 9.5 basis points more than the 10-Year and 13 basis points more than the 30-Year in the two hours from the announcement time. Implied volatility in CME’s standard Treasury options markets dropped substantially with today’s moves.
CME’s FedWatch tool reflected Chairman Powell’s comments as well. Yesterday, the tool reflected a 95% chance of a 75 basis point move at the June meeting and a 4% chance of a 50 basis point move. Today, the tool is reflecting a 21% chance of a 50 basis point move. It is somewhat interesting that the Fed Funds market continues to price in a greater probability for a 75 basis point move, even after Powell’s comments.
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