Markets reverse on June hike

Kalshi traders now predict an additional rate hike this year

Kalshi markets project the Federal Reserve to hold the target federal funds range in June at 5.00-5.25%. The probability of at least a 25 bp rate hike is 28%. At the end of last week, following a higher than expected PCE report, expectations of a hike jumped as high as 64% before suddenly falling back down. There is still significant uncertainty over the path of interest rates for the remainder of the year, with many officials–like Philadelphia bank President Patrick Harker and FOMC member Philip Jefferson–signaling an intent to pause interest rate hikes. For reference, Kalshi markets inflation to come in at 3.2% in 2023, significantly higher than the Fed’s 2% target but much lower than last year’s 6.5%.

If the Fed doesn’t hike, it would mark the first meeting the FOMC has not hiked since January 2022. CME’s FedWatch tool gives similar probabilities for June, with a 68.9% probability of a pause and a 31.1% probability of a hike. Kalshi Traders have moved, though, to project another hike this year with a probability of 63%.

In the past, CME Fed Futures have comparatively priced in a significant fall in interest rates over the second half of the year; those expectations have reversed significantly in the last two weeks. The probability of at least one hike by December is now only 44.3%, compared to 100% just a few weeks ago. On Kalshi, the probability of a rate cut has dropped even further to 31%, from 39% last week and 49% the week before that.

Month-over-month Inflation expectations for May are a mere 0.07%, much lower than April’s 0.4%. This is stable from the last few weeks but still considerably lower than the Cleveland Fed’s Nowcast prediction of 0.19%. Kalshi markets expect a mere 10% chance that inflation is 0.2% or greater in May. Core inflation, which strips out volatile food and energy prices, is expected to remain high in May, with Kalshi forecasting a 0.33% print. Annual inflation expectations, meanwhile, fell to 3.20%, the fourth week of straight declines and the lowest expectation since early February.

Job growth came in at 339,000 in May, higher than Kalshi’s forecast of 234,748. The unemployment rate ticked up to 3.7. This trend–a very strong establishment survey (jobs added) survey and weak household survey (unemployment rate)–has left most analysts unphased. The household survey tends to be more volatile, while the establishment survey has shown consistent job growth for more than a year. This continues a narrative that has been building for months: for all the talk about asset price uncertainty, investment pullbacks, and layoffs, job and income growth remain strong and are projected to stay that way. GDP growth is nonetheless expected to be anemic in Q2, with a growth rate of 1.21%. The Fed’s GDP Nowcast is a more bullish 2.0%. Kalshi traders maintained odds of two consecutive quarters of negative GDP growth sometime in 2023 at about 37%.

Two consecutive quarters of negative GDP growth

About the Kalshi Whisper

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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