Kalshi smashes other CPI forecasts
By Xavier Charles Sottile- CPI and core come in much lower than expected
- Chance of a rate cut this year moves closer to zero
- Low inflation expected to continue; recession chances fall even further
Inflation Report
Inflation nosedives in June
Headline inflation came in at 0.2%, below expectations. What’s more notable is that core inflation also came in at 0.2%, a surprise given the persistence of 0.4% (almost 5% annualized) prints from last December to May. There have been several instances of headline inflation coming in low before rebounding again, but core inflation has remained strong until now. Kalshi’s market-based forecasts were spot on in predicting June’s data, hitting when the rest of the market missed.
Month-over-month inflation expectations for July are a mere 0.14%, even lower than June’s print (which, unrounded, came out to 0.18%). Annualized this rate would bring us to just shy of 2% inflation. Core inflation is predicted to be similar at 0.16%. The Cleveland Fed, on the other hand, is still predicting 0.34% inflation and 0.4% core for July.
In a similar vein, expected annual inflation continues to fall. It is currently at its lowest prediction since Kalshi’s market opened last September, at 2.92%.
2023 US annual inflation is forecasted to be…2.92%
Fed Fund Rate Report
Stability expected: no cuts, two more hikes
Kalshi markets project the Federal Reserve to raise the target federal funds range at its July meeting 25 basis points to 5.25-5.50% with a 95% likelihood. Traders have moved the chance of a rate cut to near its lowest ever since the market launched last September at 13%. Wednesday’s inflation print sent the odds of another 25 basis point hike in September down to 20% from 28%. Increasingly, the market is pricing certainty where there once was uncertainty. CME Fed Futures have comparatively priced in only a single hike by the end of the year.
Probability of a 25 bp hike in July is...94%
Probability of terminal rate being either 5.25-5.50% or 5.50-5.75%..85%
The probability of a rate cut in 2023...13%
Growth Report
Recession odds nadir
Positive economic news keeps on coming. Job growth came in at 209,000 in June, slightly lower than Kalshi’s forecast of 286,747. The unemployment rate ticked slightly down to 3.6%. This continues a narrative that has been building for months: for all the talk about asset price uncertainty, investment pullbacks, and layoffs, job and income growth remain strong and are projected to stay that way. GDP growth is nonetheless expected to be merely okay in Q2, with a growth rate of 1.49%. The Fed’s GDP Nowcast is a more bullish 2.3%. Kalshi traders maintained odds of two consecutive quarters of negative GDP growth sometime in 2023 at about 14%.
The probability of a 2023 recession is forecasted to be…14%
Two consecutive quarters of negative GDP growth
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.
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