FOMC: replay of the December meeting stings the dollar

<p>The FOMC meeting was basically a non-event since the vast majority of the market expected the Fed to hike interest rates. Even the dot plot, […]</p>

The FOMC meeting was basically a non-event since the vast majority of the market expected the Fed to hike interest rates. Even the dot plot, that expects two further rate increases in 2017, was basically unchanged since the December meeting, and was largely expected after the disappointing wage component of last week’s US Labour market report.

It is fair to say that the outcome of this meeting is unlikely to trigger a major sell-off in risky assets, but it is also unlikely to trigger another leg higher in US equity markets. This market response is exactly what Yellen and co. want – stable asset prices and low volatility, and that is what they have got.

Fed’s slow puncture in Trump trade

Interestingly, since the last major Fed meeting in December (I’m ignoring the non-event in early Feb), the S&P 500 has continued its upwards assent, but it has only managed to rise by 100 points, which is a slower pace of growth compared with November to December last year. Thus, Fed rate hikes are impacting the stock market and slowing down the Trump rally.

The big question now is, can the Trump rally survive with two further fed rate hikes on the cards in the coming months and no sign yet of the Trump administration’s tax cuts or fiscal stimulus plan? We believe that markets have the potential for further upside, but another leg higher will not be achieved unless Trump manages to get Congress to agree to an enormous fiscal stimulus plan that can truly boost growth.

Treasury bear market put on ice for now

The reaction in Treasury yields was worth noting. 10-year yields may have only dropped 10 basis points, but this is a significant move when yields are only 2.5%. The retreat from 2.6% is significant, as this is a key level of resistance and it suggests that yields could remain low for some time as the Fed enters a goldilocks scenario where growth is not too hot or too cold, but just right for a gradual pace of rate hikes. Interestingly, the 2-year yield also backed away from 1.35%, which is another key resistance level. Bond market bears seem to have lost their oomph now that Yellen and co at the Fed are only willing to  “commit” to two further hikes this year. Thus, the drive higher in Treasury yields is unlikely to come from the Fed, instead the resumption of the Treasury bear market is likely to be dependent on Trump’s economic policies.

Yellen takes the shine off the dollar

Weakness in yields obviously has a consequence for the dollar, which is 100 points lower post the Yellen press conference. 100.00 is now key support for the dollar index. The commodity currencies are the top performers in the G10, while GBP/USD is at its highest level for 2 weeks, and has reversed Brexit-inspired losses from earlier this week. USD/JPY has also fallen to its lowest level this month, which is to be expected, as this pair is sensitive to Fed rate decisions. The euro is lagging this recovery as we wait for Dutch election exit polls due at 2000 GMT. If there is a poor showing for the Far-Right PVV Party then we would expect the euro to play catch up.

Overall, we said that there was a possibility that stocks could rise and the dollar and Treasury yields drop even after today’s rate hike, and that has now been the case. The next key event from a Fed-watching perspective will be the March payrolls, wage data is key and another disappointing reading could make it unlikely that we will even get two rate hikes from the Fed this year…

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.