Dovish Fed statement but hawkish rate projection chart brings confusion

Outlook:

We are still stunned and confused about a dovish Fed statement and a hawkish rate projection chart. The FT says the conflict has made us all “dotty.” The dot-plot is more readable at the FT than the WSJ, by the way. The FT notes that the dot-plot shows the Fed members see rates higher, sooner and the bond market does not. The Fed sees the Fed funds rate at 1.375% by end-2015 while the bond market gets 0.76%. For end-2016, the Fed sees 2.875% while the bond market gets 1.82%. The FT doesn’t disclose where it gets its market forecast.

So why did Yellen say she doesn’t give much credence to the San Francisco Fed’s study last week showing precisely this kind of divergence between the Fed and the market? An analyst at RBS told the FT “The bond market is still underpricing the Fed and needs to correct. The Fed is moving towards a less dovish statement and over time yields will rise leading to a flatter curve.”

It takes a minute to digest that “flatter curve” idea, but he is right—after the whole curve shifts upward, it should be flatter. The FT doesn’t miss the opportunity to point out that the equity gang might be in for an unhappy surprise.

On recent experience, the statement should count for more. That means the dollar should be softer. And yet a breakout is always to be respected, and the euro in particular has its own tough row to hoe. What happens next? We have to watch out for a break of the broken support line, which becomes a form of resistance. This is more honored in the breach than in the letter, but never mind. The danger points lies at around 1.2930 today. So far it looks like it will not get broken.

The calendar today includes housing starts, the Philly Fed, money supply and Fed balance sheet, and the usual Thursday jobless claims. Looming over it all is the Scottish referendum. We probably won’t get US-style talking heads and graphics on TV, more’s the pity. The FT has a detailed section on each council and when its tally can be expected (“When to expect what”). This will probably be a better source than TV, in the US, anyway. It ain’t over until the fat lady sings. We hope the Scots give the UK a comeuppance and to hell with the fiscal stuff.

Net-net, we like the dollar against the other majors and we still think the pound will slide backwards after the referendum, no matter the outcome.