Big GDP boost leaves questions

GDP growth came in at a powerful 4.9%, ahead of Kalshi’s projection of 3.97%. Non-farm payrolls for October will be released this Friday, with an expected gain of 208,748 jobs added, a healthy bit higher than the consensus estimate of 150,000. However, a recession (very loosely defined as two quarters of consecutive negative GDP growth) is projected to have a 48% chance of happening by the end of 2024. The Q4 GDP print hasn’t assuaged fears that the sudden spike in interest rates to pre-2000 levels will push the economy to a sudden downturn.

Kalshi traders project Q4 GDP to fall back closer to the historical average and grow at an annualized rate of 2.35%. The Federal Reserve’s GDP Nowcast is similar, at 2.3%.

The chance of another hike by December is now just a mere 16%, down from 30% two weeks ago and 42% three weeks ago. The chance of such a hike in November is now near-zero (2%). 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 (84%) of the Fed cutting rates by the end of next year.

Traders project headline inflation in October 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 0.32% in October, on par with last month’s 0.3%. Expected annual headline inflation is 3.39% and expected annual core inflation is a tad higher at 3.95%.

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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