Fed: Same game, different rules
The Federal Reserve at its policy meeting on 16th June, whether inadvertently or by design, reset financial markets’ clocks.
The dust has since settled somewhat, with US short-end and long-end yields, the US Dollar and S&P 500 trading sideways for the past couple of sessions. When looking at the past month, hawks, doves, bulls and bears can all claim at least a partial victory.
The million Dollar question remains when the Federal Reserve will start tapering its asset purchases and hiking its policy rate. FOMC members will undoubtedly try to refine their thoughts in coming weeks, as will Chairperson Powell today in his testimony before the Joint Economic Committee.
But the next big hurdle for markets is Friday’s release of PCE-inflation data for May. Markets in May glided past US inflation data releases largely unscathed, in line with our forecasts, but the financial landscape has undergone a paradigm shift in the past week.
Our view is that that unless PCE-inflation in May surprises materially to the upside, US short-end yields may retrace somewhat and the Dollar give back some its recent gains – but this is admittedly not a high conviction call.
The Federal Reserve’s anonymous dot-charts have their limitations but for now we are sticking to “our core scenario that the Federal Reserve will only start tapering its monthly asset purchases in 2022 and only start hiking its policy rate in 2023”.
We also think that that the gap between the start of the taper and the start of the rate hiking cycle will likely be materially shorter than the 24 months gap in 2013-2015.
Our next FIRMS report will focus on Sterling and Euro, which are drawn level as we approach half-time. Sterling has at the margin dominated the encounter in the past month, with the GBP/EUR cross currently trading around 1.168 – the upper half of a still depressingly narrow 18-week range of just 2.7%. We think Sterling will continue to slowly pull ahead in Q3 before losing steam in Q4.
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Olivier is an economist and rates & FX strategist with over 22 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.