There were no surprises in Yellen’s speech in Chicago on Friday in which the Fed chair confirmed the sudden and dramatic hawkish turn hinted at earlier in the week by Dudley and Williams, and which sent March rate hike odds from the low 30s to nearly 100% in the span of days. According to Yellen, the FOMC would “evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”, and yet the market reacted in a dovish way, selling the news, with the dollar and yields sliding, and most importantly, the curve flattening, suggesting i) that next week’s payrolls report – the only real variable between now and the March 15 FOMC announcement – may be a disappointment, and ii) that continuing the rate hike cycle here is a curve flattening policy error.
While the market’s “selling the news” was perhaps unexpected, Wall Street’s analysts were delighted to be spoon-fed by Yellen, as the “message received” note by Deutsche Bank demonstrates…
… with virtually everyone now expecting a March rate hike. Here is a summary of Wall Street’s Yellen postmortems.
Deutsche Bank (Joesph LaVorgna)
- We expect the Fed to raise rates this month, and then two more times this year. The Fed has become less concerned about inflation, as the growth rate of the core PCE deflator (1.7%) is only a tenth below policymaker’s yearend 2017 forecast.
- We expect a sharp rise in business spending to lift productivity growth from the doldrums, thus raising wage inflation and perhaps labor force participation, too. The Fed will be keen to let these structural changes play out, instead of short-circuiting the business cycle by rapidly raising rates
JPMorgan (Michael Feroli)
- Pulls forward expectations for the next rate increase to March from May; increases forecast to 3 hikes — in March, June and September — from two previously
- “The notably quick pivot in Fed rhetoric continued today and became even blunter”
UBS Wealth Management (Jason Draho)
- Yellen comments clarify Fed rate-increase timing, but markets are still assessing pace
- “Until there’s more evidence of accelerated growth or inflation, we don’t think the market’s going to price in more in terms of rate hikes”
- Fed chair’s comments have “muted” impact on currencies Friday; UBS sees USD approaching top against EUR and JPY
- Expects UST 10Y yield will stay rangebound around 2.5% for next 3, 6 and 12 mos as market digests changes in fiscal policy and Fed tightening cycle
UniCredit Research (Harm Bandholz)
- Fed’s eagerness to pull forward next move implies the central bank feels it’s getting too far behind the curve
- UniCredit moves expectation for next hike to March, from June; now forecasts three increases this year, up from two previously
- “Barring any major negative shock over the next couple of days (e.g. a massive selloff in the market or a really disappointing employment report), the Fed will raise in two weeks –- and it has to”
CIBC (Bipan Rai)
- Yellen remarks send clear signal that Fed will raise rates this month
- “With March fully in the price, the lack of new information and the focus on the still neutral medium- term outlook has taken some wind out of the USD’s sails”
- Fed chair’s comments suggest three rate increases are acceptable this year
TD (Mark McCormick)
- USD may consolidate as event risk from Yellen speech passes
- “We would use a squeeze in positioning near-term to re- engage fresh long USD exposure into next week’s data releases with long exposure against CAD, EUR and JPY”
Amherst Pierpont Securities (Stephen Stanley)
- Yellen comments give “the final go-ahead that the markets were expecting” for a March rate hike
- Economic environment is much healthier now than it was in spring 2016, particularly with higher inflation
- Expecting a “triple shot of hike-worthy data points” next week, including strong U.S. payroll data, decline in unemployment rate, and acceleration in y/y average hourly earnings advance
FTN Financial (Christopher Low)
- Yellen “said they have not yet decided, which implies at least some uncertainty. But, she also drew attention to a particular meeting, which has been used in the past to signal odds of more than 50%. My sense is she believes the FOMC is likely to hike in two weeks, but she has not made up her own mind definitively and will not until she is in the meeting”
Scotiabank (Shaun Osborne)
- “Profit-taking is driving USD a bit lower but March looks a lock,” and Fed comments may have increased the potential for more than three hikes this year
- Dot plot will increase in importance at March 15 Fed meeting
- EUR/USD will need to drop to 1.0545 to extend losses; sees decline to ~1.0400 in the next 1-2 weeks
Silicon Valley Bank (Minh Trang)
- Long-term rate differential will favor the USD even if market is “unimpressed” in short term
Goldman (Jan Hatzius)
- Given constructive comments about current economic conditions from many Fed officials this week we think committee members will see recent news as consistent with their outlook, and therefore supportive of further tightening.
- We see this as a strong signal for action at the upcoming meeting, and have raised our subjective odds of a hike to 95%.