A notable change in rhetoric and approach from Fed speakers was confirmed on Firday with Janet Yellen’s hawkish lean that now all but confirms that the Fed will increase interest rates in March. The Non-farm Payrolls report will be key this week as a likely confirmation for a Fed rate hike. We look at how forex, equities and commodities markets are positioned.
Just a week ago, there was a threat that Treasury yields could break key support and put the dollar under pressure, however there seems to have been an almost coordinated move from FOMC members to prepare the market for a rate hike in the FOMC meeting on Wednesday 15th March. The Fed historically has been reluctant to increase rates without a high degree of expectation from the Market. Since the Fed signalled in its December dot plots that there could be a possible three quarter point rate hikes in 2017, the market has been questioning the delivery of this. For the last couple of months, just two hikes have been priced in. However rhetoric from habitual FOMC doves has changed the market outlook. Bill Dudley said, “the case for tightening has become a lot more compelling”, with Lael Brainard adding that it was “likely be appropriate soon to remove additional accommodation”. A dramatic repricing for March has now taken place with Fed Funds futures pricing hikes in March, September and December, whilst 2 year yields now at multi year highs over 1.30%. The FOMC would want the room to move on a hike without being compelled to do so and Yellen went with a classic data dependent line. So with the market prepared, is the real risk to the downside in the near term, with the move now having been priced in? Perhaps it will be the dot plots that once more pull the dollar higher if the FOMC hints at four instead of three.