Rate cut expectations pushed back to May
By Xavier Charles Sottile- Expectation of cut delayed from March to May
- Rate cuts expected this year falls to 5
- 160.7k jobs to be added in Jan
Fed Fund Rate Report
Cut odds continue to slightly fall
In the last 4 whisper reports, Kalshi traders have cut rate cut expectations this year from 6 cuts, to 5.5, to 5.3, to 5 rate cuts flat. Our traders are currently pricing the year-end federal funds rate range to be half-way between 4.50% and 4.75%, a 25bp increase from last week. The CME’s FedWatch tool, by contrast, projects the year-end rate to most likely (36.1%) settle at 3.75-3.400%, a healthy bit lower; both forecasts moved up 25 basis points since last Friday. Odds of a March rate cut have collapsed from a peak of 62% to a mere 33%. Odds of a cut by May, though, are at 75%.
The probability of a rate cut by March 2024 is 33%
Inflation Report
Inflation sub-components mostly expected to fall
Last month, shelter was a dominant force in keeping the Consumer Price Index up. Kalshi’s added a number of CPI sub-components to get a better read on what’s driving price movement. This month, another significant gain in shelter is expected with mild drops in the ultra-volatile gas and used cars categories. Annually, headline inflation is expected to come in directly at the Fed’s target of 2%, with core inflation a little higher at 2.4%.
For comparison, the Cleveland Fed’s Nowcast currently has January 2023 inflation at 0.18% headline and 0.32% core.
2024 US annual core inflation is forecasted to be 2.4%
Growth Report
Signs of economic weakening and strengthening
Kalshi expects the American economy to add 160,700 jobs to non-farm payrolls in January 2024. For the fourth quarter, GDP expectations on Kalshi have etched up slightly at 2.3%. The Atlanta Fed’s GDP Nowcast is projecting a higher print of 2.4%. Odds of a recession (two consecutive quarters of negative GDP growth by the end of 2024) have remained stable, down now to 39%, still eerily high.
Odds of a recession (two consecutive quarters of negative GDP growth) by the end of 2024 is forecasted to be 39%
GDP growth in the fourth quarter of 2023 is forecasted to be 2.3%
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.
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