Despite recession fears, markets predict growth

• Growth stronger than ever despite now years of recession warning
• Chance of another rate hike this year crumples despite strong job growth and inflation in September
• Inflation expected to fall back to lowest levels yet 

Growth Report

Growth expectations higher and higher despite previous feathers

Almost exactly one year ago, a model at Bloomberg was published with the headline: “Forecast for US Recession Within Year Hits 100% in Blow to Biden.” Conversely, Kalshi projected positive growth for every quarter over that year. Over the last year, real GDP growth was a not-so-recessionary 2.4%. In fact, Kalshi’s GDP projection for Q3 has grown higher every week since August. It now stands at 3.95%, compared to GDP Nowcast’s 5.4%. This would mark the highest level of quarterly GDP growth since Q4 2021 in the thick of the pandemic recovery, where income grew 7% before falling both in the first and second quarters of 2022. Kalshi projects a high – but far lower than 100% - chance of a recession by the end of 2024 at 43%. 

GDP growth in Q3 is expected to be 3.95%

Fed Fund Rate Report

Another hike this year looks less and less likely 

Initially, the hot jobs report slightly boosted the chance of another rate hike by the December Fed meeting from 36% to 46%, but since last Friday, those gains have all reversed. The chance of another hike  is now just a mere 14%, down from 30% last week and 42% the week before that. The chance of such a hike in November is now near-zero (2%). Kalshi markets expect a longer and longer period of stability, with rates staying where they are until the June 2024 meeting. This would represent the longest that the Fed has stayed pat on non-zero rates since the year between rate hikes between December 2015 and December 2016. Kalshi traders nonetheless project a high probability (84%) of the Fed cutting rates by the end of next year.

Probability of a 25 bp hike in November is 2%

Probability of the target rate range being at least 25bp higher at year end…14%

The probability of a rate cut by the end of 2024…84%

Inflation Report

Headline inflation to hit lowest level in years

Traders project headline inflation in October to be 0.10% month-over-month, much lower than September’s 0.4% and August’s 0.6%. THis would be the lowest level since the slight deflation in January 2022. Low, and even negative, inflation is common in January; inflation demonstrates significant seasonality and tends to drop after the spending heavy holiday season. That, combined with the massive Omicron wave, pushed prices down slightly. That marks a major difference from right now, when growth is above-average and unemployment is still well below 4%. Average gasoline prices have been falling from their high, down to $3.7 from a nearly $4.0 price point in late summer. However, core inflation is expected to make a much smaller fall, staying around 0.3% in October, on par with last month’s 0.3%. Expected annual headline inflation is 3.43% and expected annual core inflation is a tad higher at 3.95%.

2023 US annual inflation is forecasted to be 3.43%

October headline inflation is forecasted to be...3.24%

About the Kalshi Whisper

The “whisper” number is a private, unofficial number that is circulated by bank analysts to their clients, including high net-worth individuals, Wall Street traders and hedge funds during the blackout period after the official consensus is published and before data is released. Analysts and economists at banks continue to revise their estimates during the blackout period, but share their new forecasts with a limited clientele. They call these late forecasts “whispers” because they’re not public and not broadly accessible. Kalshi forecasts serve as a more accessible market-driven “whisper” during the blackout period, before the release tomorrow. 

The Kalshi Whisper comes from market prices based on CPI, core CPI, target fed funds markets and other relevant Kalshi markets. Markets are purely directional: traders purchase binary contracts on a central-limit order book that pay out based on conditions such as “CPI inflation exceeds 0.2% in November 2022”. From these contracts, one can simply extract the probability of any given release. For example, the probability of CPI inflation equaling 0.2% is equal to the price that CPI inflation exceeds 0.1% subtracted by the price of CPI inflation exceeding 0.2%. Current projections are based on the last traded price for contracts. Federal funds rate projections come from binary markets that pay out on the basis of the upper bound of the Federal Funds target range.

Kalshi markets have a history of accuracy. The median Fed projections have correctly identified the size of the rate hike for each meeting since the first Kalshi Fed projection in July 2021. The median CPI forecasts have been equally accurate or more accurate than the Bloomberg economist survey and the Cleveland Fed Nowcast in 11 of the last 13 months.

Disclaimers

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This communication has been prepared based upon information, including market prices, data, and other information, from sources believed to be reliable, but Kalshi does not warrant its completeness or accuracy except with respect to any disclosures relative to Kalshi and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication.

The opinions and estimates described herein constitute a reasonable judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Kalshi’s research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, Kalshi may be restricted from updating information contained in this communication for regulatory or other reasons.