Clear Communication Breakdown Between Fed and Market - Rabobank
Michael Every, Head of Financial Markets Research at Rabobank, suggests that the Yellen’s speech yesterday was consistent with recent Fed tradition in that it was all things to all men depending on how one wanted to read it.
“For example, the FOMC Chair made it clear that she is still confident of the underlying positive momentum in the US economy (hawkish), enough so to warrant another rate hike ahead (hawkish). However, she did point out that the May jobs report was disappointing (dovish), that investment spending was weak (dovish), and that international risks were still high (dovish).
Taken together one could argue it was a case of cautious optimism – but certainly cautious enough that we can take a June hike off the table, and possibly a July hike too unless there is a very vigorous rebound in activity/jobs, and the international situation suddenly stabilizes. (As such structural issues suddenly do, of course.)
Our own FOMC watcher, Philip ‘Colonel Tigh’ Marey sees the risks of September being the next “live” meeting while still sticking with July for now on the view that payrolls data could well bounce back. Yet the market is less hopeful, it seems: Fed Funds futures’ now have a 2% chance of a hike for June, 22% for July, 42% for September, and only 61% by end-2016.
In short, there is again a clear communication breakdown between Fed and market in terms of their views on what will happen next on the rates front. However, that didn’t stop 10-year US yields edging up to 1.73% yesterday while the USD index remained flaccid around the 94 level, not continuing the big Friday move, but not reversing it either.”