January's rapid job growth not a fluke

The probability of a 50 bp hike surged the morning of Friday, February 24 after the BEA released an unexpectedly high core PCE reading of 0.6% (expected 0.4%), with the probability of a 50 bp hike doubling from 15% to 31% (correspondingly, the probability of a 25 bp hike has fallen from 85% to 69%). The probability of a 50 bp hike on Kalshi, however, is congruent with CME’s FedWatch forecast of a 70% chance of a 25 bp hike. Looking forward, Kalshi forecasts the fed funds target range to rise slightly to 5.00-5.25% in May and 5.25%-5.50% in June before staying put through the rest of the year. Kalshi forecasts the federal funds target range to rise slightly to 5.00-5.25% in May and 5.25%-5.50% in June before staying put through the rest of the year.

This chart represents the expected upper bound of the federal funds range

Main Street has revised its forecast for headline CPI inflation (month-over-month) in the month of February from 0.5% to 0.4%, with the probability of 0.5% or above falling from ~69% to ~40% in the last seven days. This number is well below the Cleveland Fed’s Inflation Nowcasting tool, which projects 0.55% month-over-month CPI inflation. Expectations of core inflation, which strips out volatile energy and food prices, remain steady at 0.4%. Annual inflation expectations, however, have ticked slightly upwards to 3.35%, up from 3.15% a week ago.

Kalshi traders project roughly 235,000 jobs to be created in February, with the unemployment rate rising slightly to 3.5%. Such strong growth still represents a robust labor market that shows little sign of slowing down.

GDP in Q1, meanwhile, is projected to grow at a 2.31% annual rate, up from 1.19% at the start of February. This number is rather congruent with the Atlanta Fed’s GDPNow product (2.5%) and well above the Blue Chip consensus published by the Atlanta Fed (~-0.1%).

If a recession does come, the recession will likely start at the end of the year. Kalshi traders project that there is a 37% chance of two consecutive quarters of negative GDP growth sometime in 2023, which has been roughly stable since November 2022.

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 10 of the last 12 months.

Disclaimers

This communication is provided for information purposes only. Please read Kalshi research reports related to its contents for more information, including important disclosures.

This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but Kalshi does not warrant its completeness or accuracy except with respect to any disclosures relative to Kalshi and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication.

Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Kalshi’s research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, Kalshi may be restricted from updating information contained in this communication for regulatory or other reasons.

This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of Kalshi. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of Kalshi.

Copyright 2023 KalshiEx. All rights reserved.