Probability of 50 bps rate cut more than doubled after payroll data

The probability of a 50 basis point rate cut by the U.S. Federal Reserve has more than doubled among traders following Friday's weak payroll data. Nonfarm payrolls for July were 114,000, well below the consensus of 177,000 and the lowest since January 2021. In addition, the unemployment rate jumped to 4.3%, up from 4.1%.

The upcoming meeting, slated for September 18, 2024, has seen a significant shift in probabilities. A target rate of 4.75 - 5.00, 50 bps below the current rate, now has a current probability of 63%. This is a substantial increase from a previous day probability of 28% and a previous week probability of just 10.7%. The probability was at 31% before today's payroll data.

This shift suggests a possible decrease of 50 basis points (bps) from the current rate. If this change occurs, it would be a significant move by the Federal Reserve, reflecting a more dovish stance towards monetary policy.

On the other hand, the probability for a target rate of 5.00 - 5.25, which is 25 bps below the current rate but less so, has decreased. The current probability for this rate is now at 37%, down from the previous day's probability of 72% and the previous week's probability of 89.1%.

These shifts in probabilities indicate that traders are increasingly betting on a double rate cut by the Federal Reserve.