Fed Minutes Says The Time Is Nigh For A Rate Hike

Originally published by AxiTrader h2 Key Takeaway/h2

Stocks in the US as measured by the S&P 500 are a little weaker this morning even though the Dow made a new intra-day record high and is clinging in the black. But bonds are also a little lower even though the Fed minutes said the time for a rate rise is coming soon. It feels like the market has focussed on the risks the Fed highlighted rather than the message that rates will be rising soon if the economy stays on track. As it has since this meeting.

That dovish interpretation saw the US dollar lose significant ground almost the minute the minutes were released. It’s helped euro climb nicely from a low below 1.05 last night and the Aussie has regained 77 cents once more.

On commodity markets gold is at $1237, oil is down in what's become usual post roll volatility, while copper and base metals are a little lower as was iron ore.

On the political front the forces of the centre are aligning against Marine Le Pen in France while US Treasury Secretary Steve Mnuchin has entreated the IMF to police currency policy. That’s interesting.

• S&P 500 -2 (0.1%) 2363 (7.47 am Sydney)
• Dow Jones Industrial Average +28(0.1%) 20,772
• Nasdaq 100 -6 (0.1%) 5,859
• SPI 200 -7 (0.1%) 5,763
• AUDUSD 0.7710 +0.46%
• Gold $1238 +0.2%
• WTI OIl$53.53 -1.44%

• The Fed minutes are interesting. If like me, you think the Fed is priming the market for a move and March is actually live, then you probably grabbed the words that said “many” thought a hike would be appropriate fairly soon. But it seems that forex traders, in particular, have grabbed the bit that said the Fed still had time to react to an emergence of inflation and the discussion about the risks around the economic outlook.

• That these minutes would read dovishly was always a risk after the statement that was delivered last meeting. It seemed inconsistent with what Fed Speakers had been saying befor the FOMC meeting and it is inconsistent with what the majority of speakers have been saying since. So this is not a banner day for central bank transparency on the face of it. What the market reaction means is that the Fed still has some work to do if it is to get it’s message that rates could rise soon is truly the intention of members of the FOMC. Naturally I think for many the decision happens when they actually sit at the table and hear the discussion fro the 12 districts, the governors, and staff.

• So to this end, I expect March to end up be a signalling meeting rather than an action meeting. A signal that May or June are on the table for a rate hike.

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• That's especially the case because the market doesn't expect a hike. SO if they want to hike without a shock the Fed speakers circuit will need to ramp up the rhetoric in the next couple of weeks before the pre-meeting blackout.But if they do then it will move toward a 60/70% probability by my guess.

• On the data front in the US last night US home sales hit a fresh 10-year high and prices rose 7.7% year on year. Both those metrics suggest, along with the jobs numbers, and other data in the US that the economy is heading in the direction the Fed expects. And thus support the tightening the Fed has signalled.

• On that front Fed Governor Jerome Powell asked if March was live for a rate hike said "yes". He then added that as long as the economy moves along its current path "it will be appropriate to gradually raise interest rates, including fairly soon."

• Marine Le Pen’s chances of winning the French presidency appear to have slipped a little. That’s because of the both the ongoing probe into the employment of her bodyguard as a staffer but more importantly because traditional political forces are already coalescing against her. Last night centrist candidate Francois Bayrou – who gained 9% of the vote in the 2012 election – withdrew from the race throwing his weight behind Emmanuel Macron. Bayrou said “We are in an extremely risky situation, and to tackle this exceptional situation, I think we need an exceptional response. I have decided to offer Emmanuel Macron an alliance. The danger is too big we must change things”.

• French bonds, and their spread to German 10’s, rallied as a result of the news as traders bet political uncertainty in France was reduced a little.

• UK Q4 GDP growth was increased to a quarterly rate of 0.7% when released overnight. That’s up 0.1% from the original estimate of 0.6%. But Britain’s Office for National Statistics downgraded overall growth for the year from 2% to 1.8%. Markets focussed on this downgrade, and the 1% fall in investment during Q4 as signs of weakness in the economy.

• Mexico looks like its spoiling for a fight. Last night another government official said Mexico won’t accept unilateral immigration moves by the US.

• The WTO is trumpeting a global deal to cut red tape which they say will raise global growth by 0.5% by 2030.

• While the battle over the latest Greek bailout continues the EU has opened another front telling Italy that it needs to reduce its fiscal gap or it will cop a fine. I bet the Italians would love to be able to do that.