ON THE VERGE OF ANOTHER FED POLICY MISTAKE

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What we have been witnessing in the global markets is strong push back against US Monetary Policy and Guidance. Global money sees the Fed making yet another Policy mistake! Here is what has been occurring:

>A Weakening Growth Expectations, has lead to

>Weakening Inflation Expectations,  which has lead to

>Weakening Yields, which has lead to,

> Weakening Dollar

DATA SUGGESTS FED POLICY ON THE VERGE OF ANOTHER MISTAKE

FALLING US INFLATION EXPECTATIONS: Since the start of this year, US inflation expectations have fallen more than in other G10 economies, seeing the 10-year break-even declining from 2.07% to 1.68%. Global Commodity prices have also supported this view.

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FLATTENING YIELD CURVE: Consequently, the US 2s10s curve has flattened as investors have adopted the view of the Fed getting it wrong again.

FED HAS IT WRONG: Last week, the Fed hiked rates by 25bp to 1.25%, firmed plans to shrink the balance sheet this year and underlined its intention to hike rates by an additional 100bp by end-2018.

RELATIVE YIELD DRIVING US DOLLAR: Within the G10 context, it was the relative shift of yield curves determining currency trends, pushing the USD lower by 6% since the start of this year.

The US yield curve flattened the most within G10, while EMU and Norway’s curves have steepened in light of the ECB and Norges Bank staying accommodative. The market’s verdict seems clear – it regards the Fed’s current approach as too tight.

GROWTH EXPECTATIONS ARE WRONG:  Their point being that growth expectations at the start of the year have proved off. We have seen this sort of denial from the Fed before:

Falling tax revenues, the flattened yield curve and banks seeing low loan demand suggest the US is heading towards weaker growth. Even Macro Hard & Soft Data has begun to reverse since Q1:

The markets increasingly disagree with the Fed.

  • Despite the Fed projecting it will hike rates by 100bp by the end of next year,
  • The markets are only pricing in 37bp.”

MARKET HAVE BEEN SCREAMING SINCE JANUARY

The markets saw something at Year Beginning 2017 that has set a new direction that the equity markets have yet to digest!

It is this that is likely blinding Federal Reserve Policy. They are concerned that there is simply too much "irrational exuberance" and are trying to "tap on the brakes" ever so gingerly knowing they may have to reverse course

..... especially knowing a turn in the business cycle is long overdue!

 

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