Fed funds futures see 22% probability of no more hikes this year

Fed funds futures now imply a 22% chance that the central bank is finished hiking for 2023.

This marks a significant shift from the outlook following the CPI release, which is the most relevant data point for the Fed ahead of next week's decision. However, traders are now concentrating on how the FOMC might respond to the stock market downturn, driven by concerns over AI capital raising.

For the upcoming meeting, traders see just a 5% probability of a rate increase, the lowest level seen this month. The chance of a December hike remains at 78%, though it is no longer viewed as certain. January contracts are pricing in 27 basis points, barely enough for a single rate increase.

Further along the curve, the market expects 63.5 basis points of tightening for the year, well below the 80-90 bps that was anticipated earlier this month.

A significant repricing is occurring in the bond market, with two-year yields falling 18 basis points to 4.64% on the day. This follows Meta's filing for a new class of shares. The filing indicated that all three long-term forecasts presented to the board considered raising hundreds of billions of dollars, possibly beginning as early this autumn. Management also regarded an equity raise as "essential" for its expected business plans and foresees additional near-term capital, including equity.

The bond market may be interpreting that AI-related debt issuance has peaked, with future capital raising shifting to equity. This is negative for stock prices — Meta dropped 7.5% on the day — but it could also result in less bond supply, reducing crowding out in the fixed-income market. The shortage of capital may also be fueling anxiety over the valuation of the broader AI expansion and indicate a pullback across the sector.

For the Fed, a slowdown in AI capital raising may not be the cure for inflation. The Iran blockade persists, pushing oil prices $2.35 higher to $99.50 on the day, with fuel costs rising even more. That gives ammunition to hawkish policymakers and is likely to spark a vigorous discussion — and possibly a divided vote — at next week's meeting.