“Way” back on Tuesday in “No, Janet Yellen Does Not Need To Wait On Donald Trump,” I highlighted a few passages from a recent Nordea piece and tied the analysis to a Deutsche Bank note out in late January.
The point was important – even if you didn’t realize it.
The juxtaposition between the market conditions that prevailed following “liftoff” in December, 2015 and the market conditions that prevail now on the heels of the Fed’s December hike suggests that no matter what Donald Trump does or doesn’t do/say it’s time for another rate hike.
Again, this is key. Recall that last year jitters about the trajectory of the ongoing RMB devaluation and a deflationary spiral prompted the so-called “Shanghai accord” which led directly to a dovish March lean from the Eccles cabal. A firm dollar and plunging stock prices characterized the environment.
Well this year, the opposite is the case. The dollar has been well behaved in 2017 despite being the “most crowded” long heading into the year, 10Y yields hit YTD lows two Fridays ago, and stocks are at record highs. If they don’t squeeze one in now, the may miss a truly golden opportunity. Do yourself a favor and read the following commentary from Goldman that sheds further light on this dynamic.
Market developments following the first and second funds rate increases were strikingly different. After the December 2015 rate increase, our US Financial Conditions Index (FCI) tightened 75 basis points (bp) over the subsequent 20 days (Exhibit 1, left panel). Although the FCI tightening was not necessarily caused by the Fed’s action, the committee acknowledged the market developments at the time, and they appeared to have played a meaningful role in the dovish policy shift in H1 2016. In contrast, our FCI has eased about 45bp since the second rate increase in December 2016, as a result of lower long-term rates, tighter credit spreads, and higher equity values (Exhibit 1, right panel).
We have not made any changes to our forecast for three Fed rate hikes this year, but the sizeable easing in financial conditions means the risks to this outlook appear more balanced. In particular, we would now see four rate hikes this year as about as likely as two rate increases.
In short, that explains this week’s mad hawkish dash from Fed speakers.
It’s now or never.