Bond traders have changed their minds again. They think the Fed is more likely to cut interest rates by 50 basis points when it meets this week, rather than the 25 basis points it said before. This change is really fast, just like the weather forecast suddenly said that it would not rain today, but snow.

If you look at the swaps tied to the Fed's interest rate, it shows that the probability of a 50 basis point rate cut is more than 50%. Last week, traders almost didn't believe that it would be cut so much. As a result, the two-year Treasury yield has soared back to its lowest point in two years, and the dollar index has also fallen to its lowest point since January.

The market has been changing faster than turning the pages of a book these days, which makes the Fed's September policy meeting full of uncertainty. Everyone is struggling with how much support the economy needs and what the Fed's drastic rate cut means. It's like your friend suddenly says he wants to treat you to a big dinner, but doesn't say what to eat, and you feel very nervous.

Now that the Fed members are keeping quiet, traders can only focus on sporadic data, such as August retail sales on Tuesday. It's like waiting for your test scores, and you feel uneasy.

An expert named Philippe Marey said: "This decision is too critical." He expects the Fed to cut the rate by 25 basis points as usual. He also said that Powell did not give any clear instructions, which may mean that there is no consensus within the Fed. Moreover, once the retail sales data on Tuesday is released, market expectations may change again.

That's not all. The political situation in the United States is getting more and more tense. The FBI is investigating an assassination attempt against Trump, which is like adding fuel to the already boiling market. However, the market has not reacted yet, and the US stock market opened slightly higher.

On Monday, the yield on the two-year Treasury bond fell another 4 basis points to 3.54%, a new low since its peak of 5% in late April.

However, BlackRock strategists made a 180-degree turn on short-term U.S. Treasuries, from overweight to holding on to holding. They said the market's expectations for the extent of the Fed's rate cuts may be too optimistic. As U.S. Treasury yields are already relatively high, they are more optimistic about medium-term U.S. Treasuries with maturities of 5 to 10 years.

“I think the market has priced in a little too much depth in the rate-cutting cycle,” said Wei Li, BlackRock’s chief investment strategist. “It has started, but the magnitude may not be as big as the market thinks.” She expects the Fed to cut rates by 25 basis points on Wednesday.

Li also acknowledged that the risk of a recession may have increased, but she still believes that the U.S. economy will only slow down, not actually fall into recession. She said policymakers are still wary of "persistent" inflation in some parts of the economy.

She explained: "Look, the United States has created an average of 164,000 jobs per month in the past six months, which is still quite fast."

The market's repricing of expectations for the Fed's rate cuts has also affected the dollar. The dollar has weakened against most major currencies over the past month. The yen is one of the currencies that has risen the most, breaking through the important 140 mark on Monday.

A strategist named Rodrigo Catril said: "I think the new easing cycle that the Federal Reserve is about to start is the main obstacle for the US dollar. As the Fed relaxes its policy, the fund rate may fall to a neutral level or even lower next year, and the US dollar will begin a cyclical decline."

Technical indicators show that the dollar is still supported, but most of the market is in the weak dollar camp. Analysts surveyed by Bloomberg all expect that by this time next year, the euro, yen, Canadian dollar and Australian dollar will all be stronger against the US dollar. It's like if everyone thinks a certain team will win, then the probability of it winning must be greater. #