Will US rates finally lift the greenback? Dig in as Peter Rosenstreich, an analyst at Swissquote shares his viewpoint on the 2018 Fed Rate Hike Forecast.
31 January, Swissquote – It’s widely expected that the FOMC will hold policy steady and signal that the next likely interest rate hike will come in March. Therefore, the focus will be on the language around the meeting. Today’s statement, in our view, will acknowledge that inflation risk has shifted upwards but no material change.
2018 Fed Rate Hike Forecast
We could see a shift from characterizing the economic outlook from “Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.” to just “balanced” give the quality of upwards data surprises. However, dragging expectation is the fact that inflation pressure remains subdued, allowing the fed to keep their options open.
Inflation on a rolling 3-month average continues to print below the FOMC’s target of 2% while December’s core CPI data suggest trend inflation firming below the feds started the goal. Markets continue to discount a hawkish fed, which could catch the ultra-short USD positioning flat-footed. US-G10 yield spread has absolutely blown out; increase our concern for a near-term USD correction. Given the stretched nature of US-German spreads we see EURUSD as the most vulnerable to a pullback.
US stock markets down two days in a row
US stocks had a poor performance during the last two days, with a performance of -1.43% for Nikkei 225, -1.37% for Dow Jones and -1.09% for S& P500. This strong decrease is essentially correlated with rising oil production, announcements of health care competition on the US market and particularly worries that concern the ascending US treasuries U-curves. The decline was broad-based but particularly impacted (based on DJIA): Healthcare (-2.86%), Energy (-2.07%), Consumer Discretionary (-1.79%) and Information Technology (-1.30%).
With a +2.71% on the 10 years US Treasury notes (+0.66% since July 9th 2017) and +2.11% on the 2 year (+0.84% since July 9th 2017), the highest rate level since March 31st 2014, many investors and fund managers who rather look for income-based earnings have decided to trade up for a less volatile and risk-free investment, diminishing their equity exposure in the portfolio. 10 year US treasury and Bund differentials are now at +2.02% while UST and Japan lie at +2.6125.
USD is not following the trend and continues its depreciation against major currencies since January 9th 2018: EUR/USD +058%, GBP/USD +0.87%, JPY/USD +0.27%, USD/CHF -0.62%.
Though many investors tend to say that equity and commodity asset classes are going to suffer in the coming periods due to increasing attractiveness of Government bonds, we remain unconvinced that this will push out other investors than income-seeking bondholders or similar outside of equities for instance. We think that a more dovish Fed in 2018 will support risk, equities, commodities and US Treasury notes purchases.
This article 2018 Fed Rate Hike Forecast was written by Peter Rosenstreich & Vincent Mivelaz, analysts at Swissquote. While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein.
This document does not constitute a recommendation to sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investments.