Treasuries Tumble As Yellen Reminds Market Of Gradual Path For Rate Hikes, Brexit Hits U.K. Wage Growth, ASX SPI200 Futures +36

As widely anticipated the Federal Reserve raised interest rates by 25 basis points overnight to 0.75%. The path of projected interest rates for 2017 & 2018 remained unchanged and overall the statement by Fed Chair Janet Yellen leaned slightly more dovish than the market appeared to be anticipating. The language in the accompanying statement highlighted that job gains had been “solid” while business investment which has been a key component lacking during the recovery “appears to have firmed somewhat”. The committee highlighted that near-term risks were roughly balanced and expected “economic conditions to evolve in a manner that will warrant gradual increases in the federal funds rate”. However that will depend on the economic outlook implied by the underlying data, serving as a reminder monetary policy is not on a set path and the Fed remains data dependant.

Separately Chair Janet Yellen told reporters that the decision was in line with the gradual reduction of policy accommodation and “does not represent a reassessment”. These comments are in line with other Fed officials recently commenting that the FOMC is not behind the curve when it comes to raising rates. While currently there are indications of the Fed behind the curve looking ahead towards the July & September meetings there is the potential to see upward revisions to the expect path of rate hikes. This would largely depend on either economic data exceeding the FOMC’s projections or significant progress is made by Donald Trump on tax cuts, deregulation and fiscal spending.

In reaction the U.S. dollar index tumbled -1.11% falling against major peers shown on the first chart below, with the Euro gaining +1.16%, as did the British Pound (+1.11%), Australian Dollar (+1.92%) and Japanese Yen (+1.17%). Treasury yields dropped sharply with both the two & ten-year yields falling -7.25 & -9.5 basis points respectively. Equity markets saw broad based buying as both the S&P500 & Nasdaq100 rose +0.84% & +0.63% respectively with 443/505 securities on the S&P500 trading higher. The reaction buy the dollar and bonds is a little surprising, there certainly had been talk of the Fed leaning more hawkish however the reaction suggests a significant portion of the market had been expecting this. Further near-term weakness may follow in dollar sensitive securities as speculative positions are unwound however that is likely to prove short lived as the market shifts focus on the next rate hike and expected stimulatory policies drive up dollar demand.

In the U.K. we’re seeing more signs of the impact from the Brexit referendum with U.K. wage growth excluding bonuses in the three months to January rose +2.2%, lower than the 2.4% forecast and prior reading of 2.6%. With inflation expected to head towards 3% by the end of 2017 that will put increasing pressure on consumer spending, a key driver of the U.K. economy and therefore the Bank of England is likely to keep rates at a record low 0.25%. Still the economy remains fairly resilient with the unemployment rate declining to 4.7%. No changes are expected when the Bank of England meets tonight.

Locally the ASX200 index reversed initial declines to finish +0.26% higher on Wednesday and this morning we can expect a stronger start to trade with ASX SPI200 futures up +36 points in overnight trading. In focus today will be the unemployment rate out at 11:30am AEDT which is expected to remain stable at 5.7%.

Data releases:

·         Australian Unemployment Rate (MoM Feb) 11:30am AEDT

·         Bank of Japan Rate Decision Approx. 12-2pm AEDT

·         Euro-zone CPI (MoM & YoY Feb) 9:00pm AEDT

·         Bank of England Rate Decision 11:00pm AEDT

·         U.S. Housing Starts & Building Permits (MoM Feb) 11:30pm AEDT

Chart 1 – U.S. Dollar Index Futures

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3631.

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