Is GDP growth hitting 6% this quarter?

Earlier this month, the Atlanta Fed’s GDP Nowcast projected ~4% growth this quarter, somewhat high compared to the 2.5-3% historical average. However, the Nowcast only uses economic data for the quarter that’s already available, so it’s not a normal forecast per se (hence “nowcast”). With more data as time passes, it’s expected that the Nowcast projection would regress to the mean. And yet, on Thursday, the Nowcast moved up to an astounding 5.9% Q3 projection. For context, the last time that GDP growth was 5.9% or higher prior to 2020 was in Q2 2000. In reality, Kalshi traders estimate that GDP growth will come in closer to 3% in Q3. Though looking at the graph below, it’s clear that traders are influenced by the Nowcast, with expectations up considerably in August. Traders also expect the economy to add 168,248 jobs in August and for the unemployment rate to remain stable at 3.57%. Odds of a recession (two quarters of negative GDP growth in Q3 and Q4) are at a mere 3%.

GDP growth in Q3 is expected to be…3.07%

Inflation making a big, but likely temporary, jump this month

Traders project headline inflation in August to be 0.63% month-over-month, much higher than July’s 0.2%. This is mostly driven by energy prices. Average gasoline prices are nearly $4 ($3.894) this week compared to $3.20 at the beginning of the year. Appropriately, core inflation is expected to make a much smaller gain, moving up to 0.23% in August from 0.2% in core. Expected annual headline inflation is 3.20%.

2023 US annual inflation is forecasted to be…3.20%

August headline inflation is forecasted to be…3.61% year-over-year

Stability expected: 60/40 of one more hike this year

Kalshi markets project the Federal Reserve to stand pat at the September meeting, with only a 12% chance of hiking. Traders have moved the chance of a rate cut to near its lowest ever since the market launched last September at 7%. By year end, Kalshi trades expect a 60% chance of another rate hike. However, odds of a cut by the end of next year are an extremely high 91%.

CME’s FedWatch tool has a slightly higher probability of a hike in September (21.5%) and a similar probability of another hike by year-end (at 40.9%).

Probability of a 25 bp hike in September is...11%

Probability of the target rate range being at least 25bp higher at year end…58%

The probability of a rate cut in 2023...7%

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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