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23 Feb 2016
Fed tightening expectations readjusted - BBH
Research Team at BBH, suggests that the markets are adjusting Fed tightening expectations accordingly in light of recent firmness in the US data.
Key Quotes
“The December 2016 Fed Funds futures contract is priced to yield 0.51%. While this still implies less than one hike fully priced in for this year, the yield is the highest since it troughed around 0.39% back on February 11. Looking further out, the December 2017 Fed Funds futures contract is priced to yield 0.67%. This implies slightly more than one hike fully priced in, and is also up from the trough around 0.52% back on February 11. We think market expectations remain too dovish, and should continue to adjust.
More importantly, an upward shift in the US rates curve has helped push the 2-year differential with Germany back up to 129 bp, the highest since January 26. In turn, this has helped the dollar gain some traction against the euro. This pair finally made a clean break Monday of the $1.1070 area from last week, which was around the 50% retracement objective from the January 21-February 11 move higher. The 62% comes in near $1.10, and break below would target the January 21 low near 1.0780.”
Key Quotes
“The December 2016 Fed Funds futures contract is priced to yield 0.51%. While this still implies less than one hike fully priced in for this year, the yield is the highest since it troughed around 0.39% back on February 11. Looking further out, the December 2017 Fed Funds futures contract is priced to yield 0.67%. This implies slightly more than one hike fully priced in, and is also up from the trough around 0.52% back on February 11. We think market expectations remain too dovish, and should continue to adjust.
More importantly, an upward shift in the US rates curve has helped push the 2-year differential with Germany back up to 129 bp, the highest since January 26. In turn, this has helped the dollar gain some traction against the euro. This pair finally made a clean break Monday of the $1.1070 area from last week, which was around the 50% retracement objective from the January 21-February 11 move higher. The 62% comes in near $1.10, and break below would target the January 21 low near 1.0780.”