Friday, March 3, 2017

"Yellen and Jobs Report Last Two Hurdles to US Hike"

The dollar index has given up yesterday's gain, 101.90 last, down .31. Here's the 5-minute chart via FinViz:

From Marc to Market:
The US dollar is narrowly mixed as Yellen's speech in Chicago is awaited.  The greenback's three-day advance against the euro and four-day advance against the yen is at risk.  Sterling, however, is lower for the sixth session,  following the weaker than expected service PMI (53.3 vs. 54.5 in January and 54.1 expected).  

The dollar-bloc currencies, where speculators in the futures market had gone net long, continue to underperform.   The dollar-bloc along with sterling are the weakest of the major currencies today.  On the week, the Canadian and New Zealand dollars have lost about 2.5%, while the Australian dollar is off 1.6% and has broken out of the month-long $0.7600-$0.7700 range that had largely confined the price action.  

If Yellen (or Fischer) want to push against expectations for a hike on March 15, today may be the last opportunity.  This seems unlikely, given the recent comments by Dudley, but also Governors Brainard and Powell.  There appears to have been a relatively sudden change in the official rhetoric, and it has been seemingly without exception.  

We had thought the word cues in the minutes ("fairly soon") did not imply March, given the previous signals before the December 2015 and December 2016 hikes.  We thought June was too far but thought May was more promising and had the added advantage of giving the Fed greater degrees of freedom.  The Fed will eventually need to have the flexibility to raise rates at half of its meetings that forecasts are not updated, and there is no press conference scheduled.  

An important part of the shift in the rhetoric of Fed officials is that the rate hike is not tied to any specific trigger, such as stronger data or more improvement in the labor market.  The general economic conditions and proximity to the full employment and price stability goals are sufficient, and officials are simply looking for appropriate opportunities.  The broader context, including stronger world growth and a stable dollar (which eased on a broad trade-weighted basis in both January and February), is also conducive.  

The failure to raise rates would be potentially more destabilizing that raising rates.  Investors, seeing the rising prices and improving labor market (with weekly jobless claims at new cyclical lows) would wonder at least two things:  What does the Fed know that we don't and is the Fed slipping behind the curve?   It does not seem as if Fed officials have let expectations build to such a degree (nearly 90% by Bloomberg's calculation and almost 80% in the CME's estimate) without delivering....