RESEARCH ROUNDUP: Yellen’s March Go-Ahead Shifts Focus to Pace
(Bloomberg) -- Market participants shifting their focus to the pace of Fed rate hikes this year after Chair Yellen’s remarks firmed up expectations for an increase this month.
- FOMC “will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen says in speech
- USD -0.7%; EUR/USD +1% at 1.0611, USD/JPY -0.4% at 113.94
- 2Y USTs, the most sensitive to Fed policy expectations, erased losses after Yellen spoke, the yield falling less than 1bp; longer-dated bonds pared declines, though yields remained higher on the day
- JPMorgan (Michael Feroli, note)
- Pulls forward expectations for the next rate increase to March from May; increases forecast to 3 hikes -- in March, June and September -- from two previously
- “The notably quick pivot in Fed rhetoric continued today and became even blunter”
- UBS Wealth Management (Jason Draho, interview)
- Yellen comments clarify Fed rate-increase timing, but markets are still assessing pace
- “Until there’s more evidence of accelerated growth or inflation, we don’t think the market’s going to price in more in terms of rate hikes”
- Fed chair’s comments have “muted” impact on currencies Friday; UBS sees USD approaching top against EUR and JPY
- Expects UST 10Y yield will stay rangebound around 2.5% for next 3, 6 and 12 mos as market digests changes in fiscal policy and Fed tightening cycle
- UniCredit Research (Harm Bandholz, note)
- Fed’s eagerness to pull forward next move implies the central bank feels it’s getting too far behind the curve
- UniCredit moves expectation for next hike to March, from June; now forecasts three increases this year, up from two previously
- “Barring any major negative shock over the next couple of days (e.g. a massive selloff in the market or a really disappointing employment report), the Fed will raise in two weeks –- and it has to”
- CIBC (Bipan Rai, interview)
- Yellen remarks send clear signal that Fed will raise rates this month
- “With March fully in the price, the lack of new information and the focus on the still neutral medium- term outlook has taken some wind out of the USD’s sails”
- Fed chair’s comments suggest three rate increases are acceptable this year
- TD (Mark McCormick, interview)
- USD may consolidate as event risk from Yellen speech passes
- “We would use a squeeze in positioning near-term to re- engage fresh long USD exposure into next week’s data releases with long exposure against CAD, EUR and JPY”
- Amherst Pierpont Securities (Stephen Stanley, note)
- Yellen comments give “the final go-ahead that the markets were expecting” for a March rate hike
- Economic environment is much healthier now than it was in spring 2016, particularly with higher inflation
- Expecting a “triple shot of hike-worthy data points” next week, including strong U.S. payroll data, decline in unemployment rate, and acceleration in y/y average hourly earnings advance
- FTN Financial (Christopher Low, note)
- Yellen “said they have not yet decided, which implies at least some uncertainty. But, she also drew attention to a particular meeting, which has been used in the past to signal odds of more than 50%. My sense is she believes the FOMC is likely to hike in two weeks, but she has not made up her own mind definitively and will not until she is in the meeting”
- Scotiabank (Shaun Osborne, interview)
- “Profit-taking is driving USD a bit lower but March looks a lock,” and Fed comments may have increased the potential for more than three hikes this year
- Dot plot will increase in importance at March 15 Fed meeting
- EUR/USD will need to drop to 1.0545 to extend losses; sees decline to ~1.0400 in the next 1-2 weeks
- Silicon Valley Bank (Minh Trang, interview)
- Long-term rate differential will favor the USD even if market is “unimpressed” in short term
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Bipan Rai (Canadian Imperial Bank of Commerce/Canada)
Christopher Low (Ftn Financial)
Harm Bandholz (UniCredit SpA)
Jason Draho (UBS Asset Management Japan Ltd)
Mark McCormick (Toronto-Dominion Bank/The)
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