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Market pricing for the US interest rate:
You have two key indicators in front of you:
⚫️ The current interest rate on the US dollar, which stands at 4.5%. Keep this number in mind, we will need it later.
🟢 The futures interest rate for next December (end of the year), which shows a level of 96.215.
To calculate the expected interest rate according to futures pricing, we subtract the contract price from 100:
100 – 96.215 = 3.785% (the interest rate the market expects by the end of the year).
By comparing the current interest rate with the expected interest rate:
🥇4.5% – 3.785% = 0.715%
This means that the market currently prices in a scenario of an interest rate cut of nearly 70 basis points during this year, considering that there are 3 upcoming Federal Reserve meetings until the end of the year.
Of course, this expectation is conditional on no surprises in the economic data. Any inflation indicators higher than expected (😱) or other surprises will lead to a rapid repricing of the market to align with the new reality.
In short, investors appear notably optimistic about a significant interest rate cut. And as you know, when excessive optimism prevails, one should think with a more cautious mindset, as any change in the data will lead to immediate adjustments in interest rate estimates.
Good luck to everyone 🥇👑
