Brief: Dollar Jumps, Rate Cut Bets Falter

Market bets for >50 bps of rate cuts by the Fed's Sep. '25 meeting drop to 7.5% from over 70% two months ago.

December 19, 2024 • Est. Reading Time: 3 minutes

Mobius Intel Brief:

The Federal Reserve delivered its third-consecutive rate cut yesterday, dropping the federal funds rate 25 bps to a target range of 425-450 bps despite raising its inflation expectations for 2025.

  • Despite lowering its policy rate, Fed commentary reflected themes detailed in previous Intel Briefs — namely, sticky inflation has significantly more upside potential in the early-2025 outlook. Meanwhile, the decision to override stated inflation concerns and cut rates by another 25 bps points to ongoing concerns about the “real” labor market picture versus the Fed’s pre-revision data.

  • While participants’ volatile sentiment is a poor indicator of long term outcomes, rate cut bets implied by 30-day Fed Funds futures show a substantial shift in the market’s view of the Fed’s labor/inflation dichotomy. Probabilities for >50 bps of rate cuts by September 2025 plummeted to just 7.5% yesterday from over 70% at the beginning of October.

  • The dollar and treasury yields offer more tangible takeaways from the US’ near-term inflation/rate cut trajectory. The dollar index jumped over 1.3% from Tuesday to over 108.3 today, hitting its highest since Nov 2022. Yields on longer-dated USTs responded similarly, with the 2YR +18 bps, 5YR +32 bps, and 10YR +31 bps over the twelve days ending Dec. 18.

Though the dollar’s strength does not always outweigh other variables in the multivariate ‘global crude demand’ equation, it will likely play a meaningful role in negotiations between President-elect Trump and the growing list of countries with an outsized trade surplus against the United States. Tariff threats and a global dollar shortage remain a potent combination for foreign reserve banks in regions like China or the EU where economic activity already shows signs of stagnation.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation with respect to the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is exclusively intended for Mobius clients and is not considered promotional material.