The Fed is starting to sound more cautious, so we should re-evaluate what we see in the curve for the rest of the year.  There are only 17.6 bps priced in for this year, which seems little mind-numbingly low.  So rather than do an absolute analysis (where I say everything is too low), I thought I would do a relative one.  Here are my thoughts:

  • 160208 Fed meetingsThe next hike. I realize the Fed is unlikely to go in March, because there isn’t that much time (and data) left and they probably want to see at least several weeks of market stabilization.   Among the first half meetings, April and June seem like better candidates than March.  This is why I suggested rolling FFG-J in to FFK-N before payrolls.  I think June is more likely than April for four reasons: (1) if the Fed actually moves in March (10% chance), it is unlikely for them to hike again in April, (2) if they skip March, we only get 1 more payroll until the April meeting – it is unlikely (but not impossible) we get a huge turn-around from a “hold” attitude in March to a “hike” attitude in April in that short amount of time, (3) we get two payrolls between the April and June meetings, (4) the Fed has to prepare SEPs for June, so they may give the rate path additional thought, (5) if they have any mental mid-year benchmarks, they may be more inclined to do a “catch-up” move.
  • July is unloved. Less than 5% chance of a hike?!?  Again, I suppose if the Fed hikes in June, July is probably off the table, and if they skip June, things may be really ugly.  As much as I like June, I can’t say June should be worth 4x as much as July.  So you may start looking at buying FFK-Q (to include July) in any future trades, if it only costs 1bp more than FFK-N.
  • The election. To what extent will the timing of the election will have on later meetings?  In an ideal world, the answer is “none.”  However, it’s not clear what role politics will play if the race becomes tight and the rate decision is very borderline.  I realize the non-quarterly meetings are less likely than their quarterly counterparts, but zero for November?!?  The zero (which is currently priced) would be absurd if it wasn’t for the fact that the Fed may be easing (instead of hiking) by November.  But if you have ease protection, there may be some value here.
  • The Dec meeting may be attractive for a number of reasons: (1) any election hesitancy could push what would normally be in November (and even September) back to December, (2) the uncertainty of the election and future presidential policy path will be removed, (3) they will have a good picture of where things stand for 2016 vs their projections/expectations, and (4) they hiked last December so some of the same normalization pressures may exist then.

On a relative basis, I think the meetings are all priced reasonably to with 1bp, so at these low levels, I don’t think buying a meeting and selling something against it is attractive.  If you are bearish, I suppose picking any meetings (or all) could be considered positive expected value.  If the Fed has not hiked by June, there may be something seriously wrong in the world, so as you move further out in the year from Q1, you probably should factor in the possibility of an ease.