MONEY MARKETS-Traders up bets on Sept 2011 Fed hike

Trade the News

Saturday September 04, 2010 08:46:15 PM GMT

* U.S. rate futures up hike expectations for next year

* Banks to repay 225 bln euros in maturing loans in Sept

* ECB liquidity extension will help cushion expiring loans

(Adds U.S. rate futures trade)

By Ann Saphir and Ian Chua

CHICAGO/LONDON Sept 3 (Reuters) - U.S. short-term interest rate futures traders raised expectations of a Federal Reserve rate hike next year after a government report showed the U.S. economy lost fewer jobs in August than expected.

The U.S. Labor Department on Friday reported non-farm payrolls declined by 54,000 jobs last month, less than the 100,000 loss economists had expected.

Traders now see about a 68 percent chance the Fed will increase its target interest rate at the U.S. central bank's Sept 2011 meeting, trading in Fed funds futures at the Chicago Board of Trade shows.

Before the report, traders saw about a 52 percent chance of a rate hike at the September policy-setting meeting.

Trading in Fed funds futures that mature in October 2011, which fully capture expectations for any policy change the prior month, fell 4 basis points to 99.58.

The percentage assumes a Fed hike would put the target rate for overnight lending between banks to 0.50 percent, up from the current range of zero to 0.25 percent.

Some market participants had been hedging against the possibility that the Fed's next move might be to lower short-term rates to head off a weakening economic recovery. Friday's jobs report appears to have allayed those concerns.

"This leaves the Fed on hold for now," said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York. "Unless the Fed sees a double-dip recession or deflation as a risk, the Fed will be in wait-and-see mode and we do not expect Fed hikes until 2012."

Traders are still not fully pricing in a rate hike until December 2011, futures show.

EUROPE

The European Central Bank's move to keep offering banks unlimited short-term funds will help take the sting out of 225 billion euros of expiring loans due at month-end, keeping a ceiling on euro interbank rates.

The benchmark three-month euro London interbank offered rate (Libor) was little changed on Friday, a day after the ECB announced an extension of one-week and one-month loans to banks until at least Jan. 18 in a widely expected move.

The ECB, which kept its benchmark rate steady at a record low 1.0 percent, also said it would keep offering three-month cash until December at a rate indexed to its policy rate. [ID:nLDE6810DM]

"Ultimately, the measure is aimed to support the structural funding of more stressed institutions, not to create incentives for balance sheet expansion in the financial system," said Lena Komileva, head of G7 market economics at Tullett Prebon.

The three-month euro Libor <EUR3MFSR=> was fixed at 0.82875 percent, unchanged from Thursday, having peaked at 0.83500 percent last month following the expiry of 442 billion euros of one-year funds in July. See [ID:nEAP000045]

This month, banks will have to repay the ECB a combined 225 billion euros as a batch of 3-, 6- and 12-month loans mature.

"With no more 6- or 12-month tenders, the amounts maturing can only be rolled over (into) shorter maturities, and therefore exposed to tighter conditions if the ECB had shifted back to variable rate tenders," said Patrick Jacq, a BNP Paribas strategist.

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