Weaker jobs report than expected

• Recession odds remain 50/50
• Kalshi traders expect no more hikes before a cut next summer
• Headline inflation expected to fall back to lowest levels yet 

Growth Report

Negative jobs report

Non-farm payroll growth came in with 150k new jobs in October, less than the consensus 170k and even less than Kalshi’s projection of 197k. Even worse, revisions reduced past jobs added by 101k. Unemployment also rose to 3.9%, again higher than Kalshi’s projection of 3.7%. The jump prompted economists like Jason Furman to bring up the Sahm rule, where recessions are signaled by a 0.50% jump in the unemployment rate relative to its low over the previous 12 months. Right now, we’re at 0.30%. Odds of a recession by the end of 2024 is 50%. Payrolls are also affected by the UAW strike, which Kalshi traders believe will end by the end of the month with 98% certainty, since deals have already been cut with the major auto companies. The early Kalshi forecast for payrolls next month, however, jumped on the news from 129k to 166k. GDP expectations fell considerably, from 2.4% to 1.88% on the heels of the weak ISM manufacturing survey released on Wednesday. October payrolls didn’t move that projection. The Fed’s NowCast is lower, at 1.2%.

GDP growth in Q4 is expected to be 1.88%

Fed Fund Rate Report

No hike expected until a cut next summer 

The Fed stayed pat, as widely expected, on Wednesday this week. The chance of another hike by December is now just a mere 9%, down from 16% last week, 30% three weeks ago and 42% a month ago. 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 at non-zero rates since the year between rate hikes between December 2015 and December 2016. Kalshi traders nonetheless project a high probability (87%) of the Fed cutting rates by the end of next year.

Probability of a 25 bp hike by year end is 9%

The probability of a rate cut by the end of 2024 is 87%

Inflation Report

Headline inflation to hit lowest level in years

Traders project headline inflation in October (data to be released on November 14) 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 $3.5 from a nearly $4.0 price point in late summer and $3.7 earlier this month. However, core inflation is expected to make a much smaller fall, staying around 0.30% in October, on par with last month’s 0.3%. Expected annual headline inflation is 3.42% and expected annual core inflation is a tad higher at 3.88%.

2023 US annual inflation is forecasted to be 3.42%

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.

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