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The Fed passed on raising rates today, and it is likely we get no more hikes this year. Bond yield’s moved sharply lower today, and the Dollar continues to sell-off. A weak Dollar setups several scenarios that will spill into global equity markets. The Dollar sits an important inflection point.
FOMC Decision – Bond Market Reaction
The Fed left rates unchanged following a two-day FOMC meeting. In all likelihood, we saw the last of 2017 rate hikes take place in June. The Fed keeps saying they will start “normalizing” the balance sheet, but the market doesn’t believe them. The normalizing of the balance sheet, in theory, should cause rates to rise because the Fed will be selling bonds. This should then push rates on the long-end of the curve higher. But the bond the market just dared the Fed to start balance sheet normalization.
Does this look like a Bond market that is in fear?
Yields Move Lower
It could be a case of just filling the gap, but yields began to move lower before the Fed announcement, but it then accelerated after the language came out. If that wasn’t enoughm the Dollar had an even harsher reaction.
Whoops!…The Equity Market? Well, we already know it’s not the sharpest tool in the shed. It’s okay; it will catch on eventually.
It is probably because the bond and currency market pay attention to economic data a little more carefully.
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Inflation is melting away…
See Oil…
or Copper?
So with inflation melting away, the market doesn’t believe the Fed about Reverse QE, or QT- Quantive Tightening.
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Dollar
As for the Dollar, it sits at a significant inflection point, any more downward pressure could send the Dollar significantly lower, with the index potentially headed to the low-80’s.
And the Euro back to the 1.20’s vs. the Dollar.
Euro to US Dollar Exchange Rate data by YCharts
Not what Draghi or Kuroda will want….
US Dollar to Japanese Yen Exchange Rate data by YCharts
A weaker Dollar is bullish for commodities and the Material Sector (XLB). If the Dollar index breaks 92, the Dollar will get materially weaker, and the Euro and Yen materially stronger.
A stronger Yen is bearish for Japanese equities and a strong Euro is bearish for European equities, as their multinationals will become less competitive. For US multinationals the opposite holds true, and they will become more competitive.
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Disclaimer:
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.