One Bank Asks: “Where Have All The Doves Gone”?

One of the things you might have noticed is that the Fed is looking at a veritable Goldilocks environment when it comes to squeezing in another rate hike.

Stocks are up, the dollar is well behaved (you’ll recall that the post-Trump-speech USD rally faded a bit on Wednesday afternoon), and the fact that 10Y yields touched a YTD low last Friday gave the FOMC a bit more breathing room between where we are today and that dreaded 3% threshold beyond which the stock/bond return correlation suddenly flips positive and equities start interpreting a bond selloff not as a risk-on signal, but in fact as a risk-off trigger.

Meanwhile, incoming data has been solid, if not ebullient, and although there’s still substantial political risk in Europe, the chances of a spillover from a structurally strong dollar to EM seem to be far lower today than they were in say, September of 2015.

So if your question going into the weekend is “where have all the doves gone,” the above should help to explain things.

Here with some further color on this most important of points is BofAML.

Via BofAML

The market is giving the Fed the chance to have its cake and eat it, too. USD is still off its highs, breakevens and oil are stable at elevated levels, EM and equities are doing well and USTs are showing no signs of a tantrum. Markets are taking a very sanguine view of the Fed’s hawkishness. In itself, this raises the probability of the FOMC following through with another hike in two weeks’ time. Short of a disastrous labor market report, it looks like the Fed is serious about convincing the market of its intention to raise rates three times this year. It would be a shock to the market for Chair Yellen and Vice Chair Fischer to go against this re-pricing, in light of what looks like a successful, concerted effort by Fed members to make March live.

doves

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One thought on “One Bank Asks: “Where Have All The Doves Gone”?

  1. If Yellen and co. raise and I’m not sure they will, as one event in Europe could throw this whole plan down the toilet. Just a thought….

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