Kalshi projects soft landing

Across Kalshi’s markets – inflation, GDP, payroll growth, recession – there has been increasing consensus that we are in soft landing territory. That marks a major departure from recessionary fears which have permeated the public consciousness for more than a year: yield curves have remained inverted; consumer sentiment is shockingly weak compared to economic fundamentals. Part of this increase in certainty among market participants is probably due to more information with which to value year-long 2023 contracts (we’re seven months into the year); but the confidence that Kalshi’s traders have in this is more than that. Odds of a recession (two quarters of negative GDP growth) are at an all-time low of 9%. GDP in Q3 is expected to be a whopping 2.45%. Confirming this, July payrolls data – released today – showed lower than expected but still material job growth (Kalshi estimate: 291k, real number: 187k) and a historically low unemployment rate (Kalshi estimate: 3.59%, real number: 3.5%).

Two consecutive quarters of negative GDP growth

Headline inflation in July is expected to be 0.19%, which would round to the same 0.2% print as June. Annualized this rate would bring us to just above 2% inflation. Core inflation is expected to be even lower at 0.14%. This would be the first 0.1% or less core inflation print since February 2021, when the omicron variant peaked, temporarily holding the economy’s recovery back.

These estimates are in stark contrast with the Cleveland Fed’s Nowcast, which currently projects much higher inflation over the next two months, including two consecutive months of 0.4% core inflation. Numbers like that could realign the FOMC’s thoughts about rate hikes, whereas Kalshi’s are more consistent with their current path.

Inflation

Kalshi Jul / Aug

Cleveland Fed Jul / Aug

Headline

0.19 / 0.46

0.41 / 0.60

Core

0.14 / 0.11

0.40 / 0.40

Expected annual inflation has slightly risen from last month 2.92% to 3.04%.

Kalshi markets project the Federal Reserve to stand pat at the September meeting, with only a 17% chance of hiking. Traders have moved the chance of a rate cut to near its lowest ever since the market launched last September at 10%. By year end, Kalshi trades expect a 50-50 chance of another rate hike.

CME’s FedWatch tool has a similar probability of a hike in September (15.5%) and a rate cut by year-end (8.6%) but considerably lower odds of another hike by year-end (at 27%).

Following a string of misses and retracted papers, two publications out of Korea last week have suggested a serious chance that a new material, LK-99, can operate as a room-temperature superconductor. This would be a massive discovery. In the status quo, a large fraction of energy is lost as it is transmitted (e.g. through metal wires). A superconductor doesn’t lose any of that energy. To date, superconductors found can only operate at extremely cold temperatures, making them impractical. The odds of a room-temperature semiconductor being verified in a major journal are currently 33%.

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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