Goldman Sachs: 'In Line With Our Fed View, We Hold To Our Dollar Bullish Call'

[thenews]

Goldman Sachs Macro Markets Strategy (Robin Brooks, Silvia Ardagna and Michael Cahill) comments: Last week's speech by Chair Yellen laid out a clear narrative for the Fed's dovish shift. The narrative goes that market turmoil in Q1, in part because of anxiety over RMB devaluation, caused markets to scale back their expectations for rate hikes, which helped insulate the US economy from adverse repercussions.

The Fed thus needed to shift dovish, in order to validate the shift in market expectations. That is certainly a reasonable narrative; it just isn't what happened.

The SPX and front-end rates have been positively correlated since August, as both have been buffeted by the ebb and flow of RMB devaluation fears. In the run-up to the last FOMC, those fears were abating, causing risk to rally and the front-end to price back hikes. The Fed shift was thus a genuine dovish impulse, causing the Dollar to fall and US equities to outperform.

We review key elements of the Fed narrative and argue that the dovish shift is: (i) unlikely to last long,given that the narrative behind the shift does not mesh well with how markets traded, i.e., is arguably quite weak; and(ii) is not obviously risk positive, given that it boosts US growth at the expense of the Euro zone and Japan, i.e., tilts growth away from where it is needed most.