Source: Wall Street

For now, the market's attention has turned to speculation about when the Fed will start raising interest rates. Because there is no "suspense" about reducing QE, the focus of the market has shifted to the inflationary trend.

As US bond yields climbed, superimposed strong retail sales data in September spurred a sell-off, and the market expected the Fed to raise interest rates for the first time in June next year, with a probability of nearly 50%.。

The probability that the Federal Reserve will flip a coin when raising interest rates in June next year.

The yield on two-year Treasuries climbed as much as 4 basis points on Friday, breaking 0.40 per cent for the first time since March 2020. The stronger-than-expected increase in retail sales in September spurred the sell-off.

Interest rates rose by as much as 10 basis points in Eurodollar futures trading, reflecting rising expectations of a Fed rate hike. In addition, the forecast for an interest rate hike in June was stuck at a time when the Fed had hinted at the end of a reduction in QE.

As US bond yields continue to rise, the probability that US interest rate traders expect the Fed to raise interest rates by 25 basis points for the first time in June next year has risen to nearly 50 per cent.

interest rateSwaps show that the market expects the Fed to raise interest rates by about 12 basis points at its June meeting. The probability of an interest rate increase of 25 basis points in September is expected to be 100 per cent, and the second increase will be made no later than February 2023.

As Fed officials have expressed support for reducing QE as soon as possible, in the view of the market, the Fed has reached a substantial consensus on this issue.

"although no decision was made to reduce the pace of asset purchases by $120 billion a month, members generally agreed that if the economic recovery was still basically on track, it might be appropriate to end the process of tapering bond purchases around the middle of next year," according to the minutes of the September meeting released by the Fed on Wednesday. "

If the QE reduction is measured by the timeline that ends around the middle of next year, at the rate of $15 billion a month, it will take eight months to reduce QE at the rate of $120 billion a month, which means it will start shrinking QE this year anyway, either in November or December.

Judging from the recent intensive "lookout" remarks by Fed officials, the Fed's focus has now shifted from non-farm payrolls to inflation again.

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