Fed will hike but the dollar has peaked – SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that the FOMC let rates on hold, as expected, said nothing in the statement about plans to shrink the Fed’s balance sheet (that’ll come later) but did strike a sufficiently upbeat tone in the economic assessment to persuade the rates market to price in a June hike with confidence.

Key Quotes

“The labour market has strengthened ‘even as growth has slowed’. Household spending rose only modestly ‘but the fundamentals underpinning the continued growth of consumption remained solid’. Inflation ‘has been running close to the committee’s 2% objective’. The message seems clear –they plan to look through recent soggy data and expect a bounce. However, for all the market’s confidence in a June hike, pricing of a second one by December has moved very little and the priced-in probability is only 54.4%.”

“For the dollar, it’s the longer-term rate outlook which matters and that hasn’t moved. 10year yields are up a couple of basis points. 1year rates in 5years’ time are 3bp higher than before the FOMC, but at 2.49% certainly don’t price in a 3% ‘terminal’ Fed Funds rate. The dollar’s been tracking the move sin forward rates closely enough but as the global economy improves and the rate outlook elsewhere changes, the DXY index has been making a series of lower highs and lower lows. The little bounce we are seeing now doesn’t alter that picture at all. It would take a break of 101.5 to change that.”