Fed funds futures are pricing in a 68% chance for a 75 bps rate cut by year-end following higher-than-expected U.S. jobless claims and a weak factory orders report.
The implied probability for a 75bps rate cut has increased steadily from no chance a month ago to 52% one day ago. However, markets still remain fully priced in for a minimum 50bps rate cut by Dec. 16.
Initial claims for unemployment benefits in the United States fell more than expected to 509k in the week ending Nov. 29, the Department of Labor reported. Continuing claims soared more than anticipated to 4.087 million for the week ending Nov. 22, the highest level since Dec. 25, 1982.
The U.S. Census Bureau's factory orders report came in lower than the consensus forecast in October, decreasing by 5.1% against market expectations for a 4.5% decline.
RBC Fixed Income strategist T.J. Marta wrote that the market is pricing in at least a 50bp rate cut.
"The market has begun to retreat from its call for the Fed Funds to be at 1.00%, a move we support, as we believe the Fed will cut at least another 50bp and keep the rate low throughout 2009," Marta wrote.
Speaking to a group of bankers in Michigan, Chicago Fed President Charles Evans said that aggressive policies work best in crisis situations. He added that the Fed will use "all weapons in our arsenal" and that the FOMC will be "thinking broadly at the next meeting". Evans is scheduled to become a voter on the FOMC in January.
By Steve Stecyk and edited by Stephen Huebl
©CEP News Ltd. 2008