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Trump upstaged ?? The Fed grabs the limelight ......

March 1, 2017

 

Trump upstaged ?? The Fed grabs the limelight ......

 

ref :- "Market odds of March rise in interest rates hit 80%" , The Financial Times

 

First of all, let's put this in some perspective. We do fully understand that for most people, what Donald Trump says and does is of a lot more interest than what a bunch of slightly bookish central bankers might get up to. Whatever one's view, no one could deny that Mr Trump is always interesting. But for markets, what various senior members of the Federal Reserve have had to say over the last couple of days has been more influential than Mr. Trump's speech to Congress last night, important though that was.

 

There were quite a few nerves evident in the lead-up to Mr. Trump's testimony. No doubt a good many of them were caused by doubts about whether he would buy into the spirit that is customary on these formal occasions. But beyond that, markets were in need of some kind of confirmation that the promises made by Mr. Trump, and therefore the trades made on the back of them, were still on track.

 

In the event, the President's performance has been described as ...... well, "presidential" , and "inclusive". These are relative terms as far as Mr. Trump goes of course and might well reflect relief in some quarters that he declined to use this particular oration to launch further attacks on the media, the judiciary and his political opponents (even if he couldn't resist a few pointy fingers in the general direction of the Democrats). But on balance, the consensus is that the speech was a clever one in that he managed to re-affirm his commitment to the reflationary policies that got him elected without giving too much away in the way of detail.

 

The market's patience is not limitless, and before long Mr Trump and his advisors will have to start talking specifics  --  not least, how they intend to pay for an agenda that includes replacing Obamacare, massive tax cuts, $1 trillion in infrastructure investment and a 10% increase in military spending. But for now, and those small matters aside, the President did enough to keep things on track.

 

Of greater importance to the markets have been the clues to immediate Fed interest-rate policy offered by various Fed officials. They seem to be queuing up to give us their thoughts this week and Chairwoman Janet Yellen will top the bill on Friday evening. This avalanche of jawboning central bankers is mostly to do with the "silent" period Fed officials are obliged to observe ahead of policy decisions, starting this time around this Saturday, March 4th. The Fed meeting takes place on March 14th and 15th, and it is often pointed out that the 15th  (decision day) is the Ides of March (ref : Julius Caesar, Shakespeare). This is of course purely coincidental and has no relevance whatsoever ..... at least that's what traders will be hoping.

 

Robert Kaplan, president of the Dallas Fed, got the ball rolling on Monday when he opined that the Federal Reserve would be well-served by taking the next step (i.e. raising rates) in the "not-too-distant" future, given how close the Fed's employment and inflation targets were to being met. Yesterday, John Williams, president of the San Francisco Fed, said that a hike would be "very much on the table for serious consideration" . Mr Williams plainly does not like to nail his colours to the mast without any escape route, but inevitably his remarks were taken as hawkish.

 

In the most telling intervention so far William Dudley, the boss of the New York Fed also speaking yesterday, said that the case for a hike had become "a lot more compelling". Mr Dudley's role is an influential one, and his reputation as being slightly on the doveish side gave his hawkish tone added weight. Fed Open Market Committee (FOMC) member Lael Brainard speaks later today, on Friday we have officials Evans and Lacker, FOMC member Powell, and Fed Vice Chairman Fischer before the biggest cheese of the lot Janet Yellen. Stand by to sift through hours of obfuscation and non-commitment to glean the Fed's real intention. Like we said, it's an avalanche ....

 

Anyway, what we've heard so far has put a different slant on things. At one stage last week the probability of a March hike was rated at 31 %. That always sounded much too low a figure, and if the 80% number quoted in the title of the FT's piece was an over-reaction, by most assessments an increase is now definitely odds-on. Mr Trump's testimony was well-received by ever-hungry stock investors (is it just us or is anyone else getting nervous ?), and if the dollar and bond yields showed some slight disappointment in the lack of detail initially they were supported by the changing consensus on the likelihood of an imminent rate increase.

 

Actually, the surprise is that the dollar did not react more strongly and that bond yields haven't gone even higher (and prices lower), though they're trying as we write ( EUR/USD 1.0539, 10yr Treasury yield 2.42%). Anyway, if expectations have changed then obviously so have the potential dangers. As things now stand, the shock will be if the Fed DON'T raise rates, not if they do. Mind you, we've got a lot of speeches to get through before Saturday not to mention ongoing releases of economic data which will culminate in a key employment report on March 10th, just days before D-Day. And as we know, things can change .......

 

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