As you might have noticed, the reflation narrative got a boost after hours when comments from a CNN International interview with NY Fed chief Bill Dudley hit the wires.
“’Fairly soon’ means relatively near future,” Dudley said, in a reference to the phrase from the FOMC minutes that had every journalist and commentator on the planet spinning hawkish headlines last Wednesday. Here are some further highlights from Dudley’s interview:
- Most of the data are consistent with above-trend economic growth
- Sentiment has improved markedly, though confidence gains haven’t translated yet into spending
- Fed can’t overreact to every stock-market move
- 3% growth is possible under certain conditions
Dudley’s remarks followed similarly suggestive commentary from the Dallas Fed’s Robert Kaplan and San Francisco Fed President President John Williams who, in the text of a speech in Santa Cruz, California, said a March hike is “very much on the table for serious consideration.”
The reaction in the dollar and rates was readily apparent:
Here’s Bloomberg’s summary:
- Yields on two-year notes surged as San Francisco Fed President John Williams said he expects a rate boost to receive “serious consideration” when policy makers gather March 14-15 in Washington. New York Fed President William Dudley said the case for tightening monetary policy has become a lot more compelling, with most data consistent with above-trend economic growth.
- The market-implied probability of a March hike soared to 76 percent, from 50 percent Monday, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the hike. Using the current effective rate of 0.66 percent and the forward OIS rate for the March meeting, the odds are roughly 60 percent, still almost double what they were two days ago. The price of the April futures contract dropped to 99.185, after opening at 99.25.
- “These two guys seem to be forceful with what they’re saying,” said Timothy High, U.S. strategist in New York at BNP Paribas SA, one of the Fed’s 23 primary dealers. Given that monthly jobs data won’t be released until March 10, less than a week before the Fed decision, “they might be trying to get a message out to the market a little early.”
- The yield on the benchmark two-year Treasury, the coupon maturity that’s the most sensitive to Fed expectations, rose almost 7 basis points to 1.26 percent, touching the highest since December. The 10-year yield increased to 2.39 percent.
- As shorter maturities led declines, the yield curve as measured between five- and 30-year debt was the flattest since August on a closing basis.
Meanwhile, the comments from Williams and Dudley were so notable that Goldman felt the need to pen a little something quick on Tuesday evening.
Here’s the bank to explain why they’ve now ratcheted up their March hike odds to 60%.
Comments today from Fed Presidents Kaplan, Williams, and Dudley provided stronger hints that the FOMC is seriously considering a hike at its March meeting. In an interview this morning, Dallas Fed President Robert Kaplan responded to the question of whether March was an opportunity not to miss by noting that the FOMC needs “to take advantage of windows when they present themselves” because otherwise an “exogenous factor” or “market events” could give it pause. Later this afternoon, San Francisco Fed President John Williams said, “In my view, a rate increase is very much on the table for serious consideration at our March meeting,” and added that he does not see the need to delay a hike. Finally, in a TV appearance this afternoon, New York Fed President William Dudley said that “the case for monetary policy tightening has become a lot more compelling” and agreed that the interviewer’s interpretation of his comments as implying a hike “sooner rather than later” was “fair.”
We do not think that a March hike is a done deal just yet. A large amount of data, including core PCE and both ISM reports, will be released later this week prior to Chair Yellen’s comments on Friday, and the employment report will be released next Friday.
As a result of today’s comments, we have raised our subjective probability that the next hike will come at the March meeting to 60% and lowered our odds for May to 10% and for June to 25%.