Following the release of the FOMC minutes from last month's meeting, the consensus narrative that has emerged says that it was dovish because there is a growing worry that low inflation is not simply due to transitory factors, notes the analysis team at BBH.
Key Quotes
“According to the narrative, this explains, the dollar's losses and the stock market rally.”
“It seems reasonable until one looks closer. The best proxy for Fed expectations is not the dollar or the 10-year yield or stocks. It is the Fed funds futures and the short-end of the coupon curve. The implied yield on the December 2018 Fed funds futures rose one basis point yesterday. The two-year note yield rose half a half a basis point yesterday. The signal is not in the magnitude of the move but direction.”
“The market has come to accept a December rate hike, just as it had to be led by the hand to recognize the March hike. It has been skeptical of hikes next year. Consider that the effective average Fed funds rate has been 1.16% since June's hike. A December hike will bring it 1.42%. A hike in 2018 would then lift the effective average rate to 1.67%. The first Fed funds futures contract that has an implied yield at that level is March 2019.”
“What of the dollar? It had sported a softer profile this week after reversing higher following the US jobs data at the end of last week. In our view, the market then had nearly completely discounted a December rate hike, and the 10-year yield reached the upper end of its six-month trading range. We thought that the focus would shift back to the ECB from the US employment data. Perhaps also contributing to the pullback in US yields are the growing concerns about the status of tax reform.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
AUD/USD remained bid above 0.6500
AUD/USD extended further its bullish performance, advancing for the fourth session in a row on Thursday, although a sustainable breakout of the key 200-day SMA at 0.6526 still remain elusive.
EUR/USD faces a minor resistance near at 1.0750
EUR/USD quickly left behind Wednesday’s small downtick and resumed its uptrend north of 1.0700 the figure, always on the back of the persistent sell-off in the US Dollar ahead of key PCE data on Friday.
Gold holds around $2,330 after dismal US data
Gold fell below $2,320 in the early American session as US yields shot higher after the data showed a significant increase in the US GDP price deflator in Q1. With safe-haven flows dominating the markets, however, XAU/USD reversed its direction and rose above $2,340.
Bitcoin price continues to get rejected from $65K resistance as SEC delays decision on spot BTC ETF options
Bitcoin (BTC) price has markets in disarray, provoking a broader market crash as it slumped to the $62,000 range on Thursday. Meanwhile, reverberations from spot BTC exchange-traded funds (ETFs) continue to influence the market.
US economy: slower growth with stronger inflation
The dollar strengthened, and stocks fell after statistical data from the US. The focus was on the preliminary estimate of GDP for the first quarter. Annualised quarterly growth came in at just 1.6%, down from the 2.5% and 3.4% previously forecast.