Market is still preparing for more Fed dovishness this week - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the markets should use the present period of quiet to prepare themselves for any potential Janet Yellen bombshells on Friday.

Key Quotes

“Arguably, if the Fed Chair follows Vegetius’ logic she should talk hawkishly, not just to sing the same tune as the Vice-Chair Fischer, but to send the clear message that rate hikes now would show the Fed is serious about keeping the inflation ‘peace’ in the long run.

Yet despite the notable surge in US new home sales yesterday (up 12.4% m-o-m vs. -2.0% expected), the market is still preparing for more Fed dovishness this week, if anything. For example, the S&P hit yet another nominal all-time high (2,187 to be precise); 10-year US yields closed unchanged at 1.55%; and yesterday’s 2-year Treasury auction saw a strong bid-to-cover ratio of 2.83, the second highest since February this year, with direct bidders accounting for 25.2% of the total, up from last month’s 10%. That being said, the US Dollar index retraced losses over the course of the day to close little changed, while the Fed Funds futures strip chance of a rate hike in December edged up to slightly over 50%, so it seems some are girding their loins for a skirmish, if not a battle.”