This week brings three major market events that could shape financial conditions through year-end: the Federal Reserve's policy decision, a key inflation report, and the expiration of $11 billion in Bitcoin options contracts.
The Federal Reserve is widely expected to hold interest rates at their current level of 3.75% to 4.00% when it meets Wednesday through Friday. CME FedWatch data shows a 90.6% probability of no change, down from 64.2% a month ago when a rate hike was considered more likely. However, most Wall Street analysts believe the Fed is not finished raising rates.
December Hike Odds Rise
Markets are pricing in a different outcome for December. CME FedWatch data shows a 68% probability of a rate hike in December, and a Reuters poll of 100 economists found all expect a December increase. The timing reflects the proximity of midterm elections on November 3, according to Yardeni Research, which noted the committee "should hike on Wednesday but won't because the midterm elections are so close."
Thursday's Inflation Data in Focus
Thursday morning will bring the PCE price index, the Federal Reserve's preferred inflation measure. Economists surveyed by MarketWatch expect prices to be 3.7% higher than a year ago, up from 3.4% in August. The Fed's target is 2%. Economic growth for the July-to-September quarter is expected at 3.2%, up from 2.2% the previous quarter, which could support inflation pressures.
The 10-year Treasury yield, which influences mortgage rates, closed near 5% on Friday and has reached as high as 5.33% in October. A higher-than-expected inflation reading could strengthen the case for a December rate hike.
Global Central Bank Decisions
Europe's central bank meets Thursday, with 70 of 73 economists surveyed by Reuters expecting it to hold at 2.50%, though most anticipate a hike in December. Japan's central bank decides Friday, with its rate already at 1.25%, the highest since 1995. Rising rate expectations from Japanese policymakers could trigger unwinding of trades where investors borrow cheap yen to purchase assets elsewhere, including cryptocurrency.
Bitcoin Options Expiry
On Friday at 4 a.m. ET, $10.97 billion worth of Bitcoin options expire on the Deribit exchange. This represents 35% of all open Bitcoin contracts on the platform. Bets on higher prices outnumber bets on lower prices almost two to one, with the single largest bet of approximately 19,950 BTC targeting $95,000—a level that would require an 18% price increase from Bitcoin's Sunday trading level of $80,472. According to Deribit data, the largest concentration of expiring contracts would expire worthless at $78,000.
The Federal Reserve meets again December 8 to 9, with the European central bank meeting December 17 and Japan's central bank on December 18. Markets are pricing in rate hikes above 70% probability at all three upcoming meetings, with this week's data and decisions likely to influence those expectations.
