- The markets remain cautious due to low Fed visibility amid a lack of key data and the government shutdown.
- Moving ahead, traders may hedge with ZN1 and similar high yields, while speculators may brace for a pullback.
- Traders await a clear direction for US interest rate futures and look ahead to US CPI and Treasury supply announcements.
The US interest futures traded cautiously this week as markets anticipated two key developments. This included the delayed Consumer Price Index data expected on 24 October because the US government shutdown lowered market visibility. The second is the FOMC meeting, scheduled to be released on 28-29 October.
In the last week, the major ZN1 and short-term Fed funds futures (SOFR) moved modestly without taking on any strong trend. ZN1 showed a sideways to slight downside trend, reflecting cautious market sentiment amid hopes of higher long-term yields if inflation or treasury supply increases.
Meanwhile, the SOFR reduced rate-cut expectations as market caution persisted. High inflation and softer labor market data shaped an uncertain market direction.
Federal Reserve Board’s Christopher Waller opined that, considering the labor market data, the FOMC should make a 25 basis point rate cut in the meeting on Oct 29. However, he also noted that the labor market and inflation data will influence future rate cuts. The situation remains uncertain despite expectations of a 25 basis point rate cut. Investors rely on private indicators and event risk for cues ahead of the US CPI release.
Additionally, this market adjustment affects future positions. Traders will likely hedge with ZN1 and other long-yield contracts to navigate risk. Meanwhile, speculators prepare for a pullback if inflation moves in favor.
On the short end, the Fed funds rate will likely have one rate cut by year-end. However, expectations of aggressive easing are slim. Liquidity metrics indicate a stable open interest as traders await a clear policy direction.
Next week, investors will be focused on the US CPI release and comments from the FOMC. If CPI’s inflation turns out stronger, a drop in ZN1 futures, and a wide yield curv,e are expected if markets scale back expectations on rate cuts.
In contrast, weak inflation data could trigger an upside in ZN1 and widen the curve further as expectations of Fed easing reignite. Traders will look ahead to Treasury supply announcements and key data amid the US government shutdown.
