Is The Fed Regaining Credibility?


MAKING SENSE - On Monday, I talked about why the US Dollar sold off despite Janet Yellen coming out strong and confirming the likelihood for a March rate hike. If you missed the report, the gist of it was that we saw a 'buy the rumor, sell the fact' reaction in the US Dollar. The market had already rallied the US Dollar on the expectation for a March hike, leaving no room room for the US Dollar to continue to move higher. And so, the market was more comfortable booking profit on US Dollar longs. When you think about it, it does make sense. Odds for a March hike sit at 95% and yet the Fed has still said it will monitor data between now and then. And between now and then we have Friday's monthly employment report. So if that's not good, it could keep the Fed from moving. And even if it doesn't keep the Fed from moving, at a minimum, the market will price lower odds for a hike and the US Dollar will decline. But is there still US Dollar upside and how can the US Dollar rally again?

STRONGER FED - I think the US Dollar definitely has room for another big run and I think the currency market got a little nutty with the US Dollar selling we saw on Friday. What it's going to come down to is this Friday's employment report and then the Fed delivering that March hike. If those things happen and more importantly the second thing (ie the Fed hike), this might be the first time in many years that we are seeing a Fed that is worried less about what the market thinks and a market that starts to worry more about what the Fed thinks. Remember, we have gone through so many years of the Fed getting hawkish but then reigning in those hawkish calls, bowing to pressure from the market to hold off. But if we have finally reached a point where the Fed is committed to keeping with its rate hike projections, the market will need to listen and will need to reconsider its positioning. This in turn could fuel another big push in the US Dollar, while also perhaps weighing on the stock market. 

The #Fed has been catering to the market for many years but may no longer be as sensitive. Via @joelkruger

LESS ATTRACTIVE - Why will this weigh on the stock market? Again, up until this point, stock market investors haven't believed the Fed would be raising rates so quickly. These investors haven't been scared by one off hikes here and there with rates still so low. Moreover, the Fed hasn't exactly done a good job living up to projections and investors have continued to buy the market. But if investors start modeling out a steady pace of higher rates over the next 12-24 months, all of a sudden, equity market valuations are looking a lot more expensive and a lot less attractive. And so, it would be logical to assume that if the Fed is actually getting serious about moving forward with a more consistent normalization process, the Dollar could be on the verge of another big run and the stock market could really finally be ready to roll over. So over the next several days, it will be worth keeping on eye on how the currency market and equity market are thinking about these things. 





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