Markets:
- WTI crude oil up 61-cents to $70.28
- US 10-year yields down 14 bps to 3.46%
- US 2-year yields down 23 bps to 3.94%
- Gold up $27 to $1967
- S&P 500 down 1.6%
- EUR and JPY leads, USD lags
The US dollar initially slumped on the Fed decision as the market sensed a dovish hike. At the same time, the S&P 500 initially rallied 1% before later falling 1.6%.
Meanwhile, the bond market was steadily bid after the Fed and that translated to steady selling in USD/JPY.
It’s not clear what the market is trying to say here. I don’t read anything about the Fed decision as dovish and the dot through year end remains above 5%. In addition, the ECB was out today with something of a premature victory lap on banking strains and talking hawkish. You have to wonder if we start to hear the same from the Fed hawks in short order.
The other factor was that Yellen was speaking at the same time as Powell and said that the US Treasury isn’t contemplating full deposit insurance. That kicked off a dump in US regional banking stocks with the KRE index finishing on the lows and down 5.7%. I think what she mean to say was that the Treasury wouldn’t do it unilaterally but with both appearances at the same time, the reaction for market participants was to get out of the way.
As for the US dollar, the market just doesn’t believe the Fed. Pricing for year-end Fed funds is at 4.15%, which is 100 bps below the dot plot and the next meeting is only at 44% despite the statement calling for further firming of rates.
I expect something of a walk-back from Yellen but I also think the market will get increasingly weary of a fight with the Fed. Watch the bank stocks tomorrow.
