The FOMC meeting was basically a non-event since the vast majority of the market expected the Fed to hike interest rates. Even the dot plot, that expects two further rate increases in 2017, was basically unchanged since the December meeting, and was largely expected after the disappointing wage component of last week’s US Labour market report.
It is fair to say that the outcome of this meeting is unlikely to trigger a major sell-off in risky assets, but it is also unlikely to trigger another leg higher in US equity markets. This market response is exactly what Yellen and Co. want – stable asset prices and low volatility, and that is what they have got.
Fed’s slow puncture in Trump trade
Interestingly, since the last major Fed meeting in December (I’m ignoring the non-event in early February), the S&P 500 has continued its upwards assent, but it has only managed to rise by 100 points, which is a slower pace of growth compared with November to December last year. Thus, Fed rate hikes are impacting the stock market and slowing down the Trump rally.
The big question now is, can the Trump rally survive with two further Fed rate hikes on the cards in the coming months and no sign yet of the Trump administration’s tax cuts or fiscal stimulus plan? We believe that markets have the potential for further upside, but another leg higher will not be achieved unless Trump manages to get Congress to agree to an enormous fiscal stimulus plan that can truly boost growth.
Treasury bear market put on ice for now
The reaction in Treasury yields was worth noting. 10-year yields may have only dropped 10 basis points, but this is a significant move when yields are only 2.5%. The retreat from 2.6% is significant, as this is a key level of resistance and it suggests that yields could remain low for some time as the Fed enters a goldilocks scenario where growth is not too hot or too cold, but just right for a gradual pace of rate hikes. Interestingly, the 2-year yield also backed away from 1.35%, which is another key resistance level. Bond market bears seem to have lost their oomph now that Yellen and Co. at the Fed are only willing to “commit” to two further hikes this year. Thus, the drive higher in Treasury yields is unlikely to come from the Fed, instead the resumption of the Treasury bear market is likely to be dependent on Trump’s economic policies.
Yellen takes the shine off the dollar
Weakness in yields obviously has a consequence for the dollar, which is 100 points lower post the Yellen press conference. 100.00 is now key support for the dollar index. The commodity currencies are the top performers in the G10, while GBP/USD is at its highest level for 2 weeks, and has reversed Brexit-inspired losses from earlier this week. USD/JPY has also fallen to its lowest level this month, which is to be expected, as this pair is sensitive to Fed rate decisions. The euro is lagging this recovery as we wait for Dutch election final results. If there is a poor showing for the Far-Right PVV Party then we would expect the euro to play catch up.
Overall, we said that there was a possibility that stocks could rise and the dollar and Treasury yields drop even after yesterday’s rate hike, and that has now been the case. The next key event from a Fed-watching perspective will be the March payrolls, wage data is key and another disappointing reading could make it unlikely that we will even get two rate hikes from the Fed this year…
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