Is a rate cut in December in doubt? Rare disagreements within the Federal Reserve in six years, "Bond King" Gross takes action to short U.S. Treasuries!

With Chairman Powell's hawkish statements and the rare publicization of internal disagreements within the Federal Reserve, market uncertainty has suddenly intensified, and even the "bond king" Bill Gross has begun to position himself to short U.S. Treasuries.

On Thursday, Wall Street Journal mentioned that Federal Reserve Chairman Powell stated after this week's Federal Reserve interest rate meeting that a rate cut in December is far from a "done deal." Additionally, during this rate decision, some officials advocated for a more significant rate cut, while others preferred to hold steady.

This is the first time in six years that such complex internal disagreements have emerged. According to the CME Group's FedWatch Tool, the probability of a Federal Reserve rate cut in December has dropped from 91.7% a week ago to 63%.

(CME Group's FedWatch Tool shows the probability of a Federal Reserve rate cut in December)

As the Federal Reserve's policy path becomes less clear, PIMCO co-founder and legendary investor Bill Gross revealed that he is selling U.S. Treasury futures, betting that high deficits and excessive Treasury issuance will continue to push yields higher.

First Bi-directional Disagreement in Six Years, Federal Reserve Consensus No Longer

The increasingly publicized disagreements within the Federal Reserve are becoming a new focus for the market. Federal Reserve Chairman Powell acknowledged in his speech that there are "strongly differing views" within the FOMC.

In this week's rate decision, two of the 12 voting members cast dissenting votes. Among them, Governor Michelle Bowman advocated for a 50 basis point cut, while Kansas City Fed President Jeff Schmid argued for keeping rates unchanged.

On Friday, Wall Street Journal mentioned that Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Kansas City Fed President Jeff Schmid each explained their reasons for preferring to keep rates unchanged.

Jeff Schmid believes the labor market is fundamentally balanced, while inflation "remains too high." Logan stated that unless there is clear evidence that inflation is slowing more than expected, she would "find it hard to support a rate cut again in December."

However, Federal Reserve Governor Christopher Waller voiced his support for a rate cut in December, arguing that "the biggest concern is the labor market," and that inflation data is moving in the right direction.

This rare bi-directional disagreement is the first of its kind in the past six years. Some market participants believe that if future economic data is mixed, this disagreement may persist for a longer time. JPMorgan's Bob Michele stated:

If future U.S. economic data is mixed, you will see more dissenting opinions. Powell is losing control over the Federal Reserve members. Look at him; he is effectively in the 'lame duck' phase of his term

"Bond King" Takes Action, Shorting 10-Year U.S. Treasury Futures

Against the backdrop of increasing uncertainty in the Federal Reserve's policy path, the former "Bond King" Bill Gross has chosen to sell U.S. Treasury futures.

According to reports, the co-founder of Pimco maintains a bearish stance on U.S. Treasuries. Gross has previously warned of the risks of excessive expansion in the U.S. financial system.

He now states that the continuously expanding deficit and the weakening dollar have led him to adopt a pessimistic view on U.S. Treasuries. Gross wrote in an email:

Trading? I am selling 10-year (Treasury) futures; even if the economy slows to 1% to 2%, (Treasury) supply is too much.

Analysts believe that in the current environment, trades that are most sensitive to changes in short-term interest rates no longer appear cheap. Investors need to adjust their strategies and shift towards longer-term bonds, which are less affected by short-term policy fluctuations. Dan Fuss of Loomis Sayles advises investors to remain cautious:

What you want to do is not stand in the traffic but walk to the safety island in the middle.

Persistently high U.S. Treasury yields provide support for the dollar index, as this makes holding cash in dollars more attractive for global investors. Jim Caron of Morgan Stanley stated in an interview:

If you expect the Federal Reserve not to cut rates quickly or significantly, that should support the dollar.

Reports indicate that Morgan Stanley's currency team, which has been bearish on the dollar in the long term, has shifted its view on the dollar to neutral after the Federal Reserve's October meeting and has recommended closing short positions on the euro and yen.

Daniel Von Ahlen and Andrea Cicione of TS Lombard are betting that U.S. short-term rates will exceed Japan's by the end of the year, with their trading strategy being to short U.S. December Secured Overnight Financing Rate (SOFR) futures while going long on the Japanese equivalent.