Get This Through Your Damn ‘Brain’ard

So basically, the message is that unless the S&P were to suddenly collapse, the Fed is going to hike.

They’re really pushing the envelope on the messaging and if you buy into the whole reflexivity argument, then you have to think they want to move – and soon. Put differently, if this is all about stocks and the dollar (“the market”) then the light is green. Like blindingly green. I talked a bit about this earlier this week. If it’s financial conditions that are the determinant, well then we are ready to go.

In case there were lingering questions – which there apparently were as the dollar faded on Wednesday afternoon, they were answered last night at 6 EST when Lael Brainard dropped a few tape bombs via prepared remarks for a speech at Harvard. To wit:

“Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path”
“We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time”
“The past few months have seen continued progress in the labor market”
“Inflation has moved up lately as the effect of past increases in the dollar and declines in energy prices have faded”
“Recent months have seen an increase in the upside risks to domestic demand,”
“Near-term risks to the United States from abroad appear to have diminished”
“As the federal funds rate continues to move higher toward its expected longer-run level, a transition in balance sheet policy will also be warranted,”
“There are good reasons to expect a normalized balance sheet to be considerably smaller than its current size but larger than its pre-crisis level”

Any questions?

You’re reminded that Brainard isn’t exactly known for being hawkish, so this represented a notable reversal and that change in tone was promptly reflected in USDJPY:

That gave the all clear for the reflation narrative to remain firmly in place during the overnight session. Panning out a bit, you can get a sense of things:

“The dollar maintained its bullish momentum as an interest-rate increase this month by the Federal Reserve largely becomes investors’ base-case scenario, with known doves like Governor Lael Brainard aligning with recent hawkish views,” Bloomberg wrote on Thursday morning adding that “Brainard, who has for months argued to keep rates lower for longer, changed tone [and] traders don’t expect Fed Chair Janet Yellen or Vice Chairman Stanley Fischer, who are due to speak on Friday, to deviate from this talk.”

SocGen was out with a similar assessment. To wit:

Lael Brainard added her notoriously dovish voice to the chorus of Fed Governors saying that a rate hike is ‘likely appropriate soon’. If we hadn’t got the message before, we have now. Job done, less than two weeks to go before the meeting and if the US equity market is still in as perky a mood on 15 March as it was yesterday, there won’t be many reasons to dither any longer. With only jobless claims on today’s calendar, the next important driver of Fed sentiment comes with tomorrow’s speeches by the Fed Chair and Vice-Chair. Janet Yellen is speaking at 18:00 GMT tomorrow at the Executives Club in Chicago, Stanley Fischer half an hour earlier at Chicago Booth School. If they are singing from the same song sheet as Brainard and Dudley, market [pricing of a Fed move will get higher still.

And so, the Nikkei rose as the yen faltered, weakening to 114.16 (approaching the 50-day moving average) from below 112 earlier this week. “A rate hike in March is almost inevitable as the Fed wants to create a buffer earlier, rather than later, against future downside risks to the economy,” Daisuke Karakama, chief market economist in Tokyo for Mizuho Bank said overnight.

European shares hugged the flatline.