Chart of the month: The roulette of rate cuts

If we think an event is likely to happen with a 25% probability, it is neither in the realm of a tail risk, nor a central scenario. It's not probable, it's not improbable, but it's definitely plausible.

Toss a coin and you've got a 25% probability of it coming up heads twice in a row. At various points in the year, bookmaker odds have implied a 25% probability of someone other than Donald Trump or Joe Biden winning the US presidential election.

Our chart of the month shows that traders now think it is plausible that the Federal Reserve (Fed) leaves rates completely unchanged all year. Using the options on money market futures, we can calculate the implied probability of there being no Fed rate cuts at the end of the year.

In January and early February, traders priced this is a 10-15% probability. That's less than the chance of rolling a 6 on a single roll of the dice. The ‘rate cuts are coming’ narrative has supported risk sentiment across the board. Risk sentiment hasn't ebbed, but the perceptions of the Fed have evolved.

The ‘no cuts’ scenario has been priced in the 25-30% range since mid-February. So it’s neither a tail risk, nor a central scenario, but suddenly it's seen as plausible.