Traders' Bets On Fed's Next Moves Shake Market Amid OPEC+ Production Cuts And Recession-Like ISM PMI Number

Investors' expectations for the Federal Reserve's next moves are facing hours of uncertainty as a result of the events that rocked markets Monday. 

OPEC+ announced voluntary production cuts of 1.16 million barrels per day, sending oil prices up 7% today, the greatest daily rise in a year. 

The most recent ISM report on manufacturing activity PMI showed an acceleration in the sector's contraction, with the overall index falling from 47.7 in February to 46.3 in March, the lowest figure since May 2020 and well below estimates (49.3).

^{See Also:} U.S. Decries Surprise Oil Cuts By Saudi, OPEC+ Amid Uncertain Market Conditions: Not 'Advisable'

Traders Now Marginally Lean Toward 25bps Hike In May: Rate odds for the May 3 Federal Open Market Committee (FOMC) meeting have swung slightly toward a 25bps rate rise, which now has a 57% chance, as compared to a rate hold option at 43%. 

The market continues to expect that interest rates will peak in June and that a rate cut in July is already more likely than not. Investors have priced in approximately four 25bps cuts through January 2024.

FedWatch: Target rate probabilities for May 3, 2023, FOMC Meeting, Chart: CME Group

Fed’s Bullard Warns Fed Needs To Raise Above 5%: James Bullard, a well-known hawk at the Federal Reserve, stated in a Bloomberg interview on Monday the Fed must raise interest rates more than 5% and his projection on the terminal rate was higher than the median in the board.

In addition, he stated the rise in oil prices may make it more difficult to combat inflation and that the markets should listen to his rate forecasts.

Inflation-Linked Bond ETF At 7-Month High: The iShares TIPS Bond ETF TIP, an exchange traded fund that invests in inflation-protected U.S. Treasury securities, has risen to the highest levels since mid-September 2022. 

The inflation-linked bond ETF has risen 3.6% so far in 2023, but it's still down 10% since the last year. 

Benzinga's Take: On the one hand, OPEC+'s decision is expected to increase oil prices and hence heighten inflationary worries, forcing the Fed to continue raising rates and become more hawkish. 

The bleak image painted by the ISM manufacturing PMI data, on the other hand, suggests the sector is already in deep recession, which might spill over into the overall economy.

Read Next: Will Jobs Data Provide Answers For Fed? Benzinga's Weekly Main Street Monitor

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