Friday’s strong US jobs report has the Fed on track for a potential roll back of stimulus as early as this September or sooner for some of those eternal optimists. The market is now moving from theory to real possibility pricing, expressed by a surge in the dollar and a move in interest rates. Investors are now expecting the EUR to remain in the ‘underperformance category’ as the US yield advantage is set to trump the persistently low ECB rate environment. Continued weakness in the commodity market will dampen investor appetite for commodity sensitivity currencies like the loonie and the AUD. In the EM stratosphere, the market will now be expecting a further uptick in money flows out of their region and into the greenback.
The problem for the Fed is that its message about tapering and eventually ending QE in mid of next-year continues to see the market price in a “higher path for the Fed Funds rate.” Despite a plethora of Fed speakers telling the market that they have got their FF predictions wrong, the market seems to be holding on to the idea that the Fed is still focused on ending QE until we have +7% unemployment and they will hike rates at +6.5%. Currently, the Fed is not interested in adding further stimulus despite it missing on its “twin mandates.”
The market inherently knows that the Fed cannot keep its “foot on the gas when it recognizes it has to apply the brakes some way’s away.” It’s a fine balancing act – the Fed has to be forward looking and they know they need to convince the market to think same way. Expect ‘Helicopter’ Ben again to be rather vocal when he delivers his testimony mid month.
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- US Industries Debate Japan’s Inclusion in TPP Talks
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- US Treasuries Little Changed as Dudley Predicts Fast Growth
- US Small Business Borrowing on the Rise
- Fed Officials Continue to Clarify Tapering Comments
- US Home Prices Print High Rise in May
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