We got a hike, but was it dovish?
The Fed had hiked rates yesterday for the first time in 9 and a half years. Yellen increased interest rates by 25 bps to much of the delight of bond managers. The path of the Fed hike will be gradual which will depend on inflation. No change to the dot plots which stayed at 1.375% but we did see some compression for 2017 and 2018 down 25 bps to 2.375% and 3.25% respectively. After the corresponding press conference we saw a decent rally across US equity and credit markets that has extended across Asia this morning. The S&P 500 rose strongly off its pre-hike levels to close up +1.45%.
The VIX sank 15% while 10y Treasuries finished pretty much where they were in the moments prior to the hike around 2.296% up +3bps on the day. However it was a better day for the 2y yields broke past 1% for the first time since 2010. Dot plots suggests 4 hike next year, where analysts are still debating if this was a hawkish more of a dovish tone. The dollar traded higher up 0.53% on the day after the hike. Oil still looking very bearish, with a very steep decline in oil prices down 4.90% and trading back below $36/bbl which in turn more than wiped out the rebound that we had seen in the first two days this week. Gold had a better night trading higher up was up over 1% testing a $1066.50/oz but it seem like a very small move; perhaps already pre-priced into the market. For now markets are buoyant and is having a positive effect on in Asia and in Europe.
Societe Generale about the dollar rally
The focus will now be on the timing of the next Fed move, the pace thereafter, and the implications for commodity prices, capital flows out of emerging markets and China’s currency policy.
If the Fed raises rates by 1% next year – in line with the path implied by the FOMC’s forecasts – the dollar will be significantly stronger by December 2016. In practise, they’ll tighten less, in part because of further dollar strength.
At 161bp, the 10-year Treasury/Bund spread remains in its recent range and until we see the Treasury market selloff, the downside to EUR/USD will probably be limited. Societe Generale referred yesterday to the bullish DXY outlook highlighted by a Technical Strategists and remains mindful both of that and of the fact that monetary policy divergence is likely to take EUR/USD to parity in due course. Still, progress towards that level may, at least initially, be choppy and slow.