Fundamental Analysis

The Fed Continues To Diverge, But Is In No Hurry!

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'Thank you, Janet Yellen,' this is today's market message to the U.S. Fed Chair.

The greenback is falling while everything else is in green today after the Federal Reserve delivered on its promise to hike rates by 25 basis points. While this move was widely expected, many market participants were positioned for a more hawkish language and an upgrade in economic projections which didn't happen.

Yesterday's hike can be described as a 'dovish hike' or 'neutral' at best. The little tweaks in the statement and economic projections suggest that the economy is still moving on the right path, but there's no evidence of overheating economy. Inflation forecasts remained unchanged at 1.9% for 2017, the GDP forecast for 2018 was revised slightly higher by 0.1%, and most importantly the dots didn't move much, indicating that only two rate hikes remain for the rest of the year.

Minneapolis Fed President Neel Kashkari who joined the Fed voting members last year surprised us with his dissent to raising rates, as opposed to 2015 and 2016 where decisions were unanimous.

Thus, markets concluded that tightening in June isn't a done deal and four rate hikes for 2017 are far from reach.

The U.S. dollar took a hit after the decision, tumbling sharply against its major peers as U.S. Treasury yields fell across the yield curve. Apparently, this disappointed dollar bulls but no doubt cheered equity investors who started to become worried most recently by the attractiveness of fixed income markets. One component for a pullback in equities is behind us for now, at least on the short run.

The Bank of Japan monetary policy meeting was a non-event today, as the Central Bank kept interest rates unchanged at -0.1%, asset purchases at ¥80 trillion, and ten-year bond yields capped near zero. However, the Bank of England meeting is likely to be more interesting as we get closer to a 2-year journey which Marc Carney described as ‘unclear', so there will be twists and turns along the way. When looking at economic data, nothing is exciting other than the drop in unemployment rate. Manufacturing, services, and construction sectors all showed signs of cooling. While no changes are expected in policy, the pound will still move on any shift between the hawks and doves.

Netherlands says no to populism

The EUR is benefiting from the Dutch election exit polls which are pointing towards a clear victory for the People's Party for Freedom and Democracy led by current Prime Minister Mark Rutte. The bigger question now is how the Dutch vote will impact the French elections. If today's election results are an indication that the populist spread will stop in the Netherlands, this might provide a further boost to the Euro which was impacted heavily by the change in political environment.

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