A Half-Point of Fed Cuts Could Be Here Before October Is Over

(Bloomberg) -- Just two trading sessions ago, traders in the U.S. swaps market were pricing in 50 basis points of Federal Reserve rate cuts by January.

As of Monday, traders moved forward those expectations by two full months to the Federal Open Market Committee's October meeting: Overnight index swaps reflect 32 basis points of cuts next month and a total of 51 basis points by the Oct. 30 meeting. On Aug. 1, they reflected 31 basis points by Oct. 30 and 51 basis points total by January.

“That's a huge swing based on the headlines of the last two days,” Scott Buchta, Brean Capital's head of fixed income strategy, said in a phone interview. “The market's not liking the escalation of this trade war and the recklessness of some of the rhetoric, and is pricing in a much more pessimistic outlook.”

Treasury yields are reflecting expectations for “a significant economic slowdown from an extended, escalated trade war,” Buchta said. This was among the uncertainties Fed Chairman Jerome Powell said concerned the central bank, and Monday's unexpected drop in the ISM Non-Manufacturing Index for July to an almost three-year low is a sign of it. “You are seeing it in the numbers. This is really what Powell and the Fed are worried about: self-inflicted wounds on the economic front.”

Yield Curve Blares Loudest U.S. Recession Warning Since 2007

--With assistance from Edward Bolingbroke.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Elizabeth Stanton, Mark Tannenbaum

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