Rate Futures Extend Gains After CPI, Certain Of Dec Rate Cut
By Jesse Thomas
Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- U.S. interest rate futures prices extended their gains Thursday morning to levels reflecting market certainty that the Federal Reserve will cut the benchmark funds rate to 4.25% in December following economic data that showed inflation remains in check.
The Labor Department reported that the October consumer price index increased 0.3%, and the core CPI, which excludes food and energy prices, increased 0.2%. While both gains were in line with expectations, it came as a jump in energy prices was offset by contained housing and clothing prices.
Also Thursday, the Labor Department said that weekly jobless claims increased 20,000, compared with a gain of 3,000 forecast by economists surveyed by Dow Jones Newswires. The stronger-than-expected increase suggests some softening in labor market conditions.
U.S. interest rate futures prices started the session higher ahead of the data as bond markets rallied in overnight trading following a late sell-off in equities on Wednesday. Futures prices have been under pressure in recent sessions as investors unwound risk aversion trades and moved their money back into stocks.
In federal-funds futures, the December contract prices in 100% odds that the Federal Open Market Committee will cut its benchmark federal funds rate to 4.25% at the Dec. 11 policy meeting, compared to 79% odds priced in for the move on Wednesday.
The Federal federal-funds contract, which gauges market expectations tied to the Jan. 29-30 policy meeting, also fully prices in expectations for a 4.25% rate, and shows 54% odds for a rate cut to 4%, compared with 34% odds seen Wednesday.
Fed-funds futures are monthly contracts, measuring expectations for the 30-day average of overnight U.S. interest rates. Fed-funds contracts allow investors to hedge or speculate on outcomes of the eight scheduled Fed policy meetings each year.
Meantime, in Eurodollar futures, the March 2008 contract fully prices in expectations for a 4.25% rate in the first quarter of next year, and shows 56% odds for a rate cut to 4%, compared with 32% odds on Wednesday.
Eurodollar futures are linked to U.S. dollars on deposit at foreign commercial banks. The quarterly contracts run 10 years out and reflect three-month settlement expectations for the London Interbank Offered Rate, or Libor. However, they're actively traded by investors seeking exposure to U.S. interest rates.
-By Jesse Thomas, Dow Jones Newswires; 312-750-4117; Jesse.Thomas@dowjones.com