Fed rate hike, take 2: Will it be different this time? - SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that a year ago, markets expected the Fed Funds rate to be in a 0.75-1% range by now and by this evening, they are likely to have crawled to 0.50-0.75%.

Key Quotes

“If for no other reason, that should caution anyone expecting much in the way of a hawkish message from the FOMC – this is a Fed leadership group whose main feature is it’s dovishness. Given that the single biggest source of economic uncertainty hanging over the US economy right now is the outlook for fiscal policy – what will President Trump do? – the temptation to be very, very bland in the statement that accompanies a thoroughly-discounted rate hike at 7pm GMT, is likely to be irresistible.”

“Where does that leave markets? Well, we’ve come full circle. The projected path of rates now is not that dissimilar from what it was a year ago. The big contrast is between what is discounted now, and what was discounted this summer, by when rate expectations had been ground into the mud by soggy growth, low inflation and volatile emerging markets. Which pretty much sums up the issue going forwards – as rates/yields move above levels seen when global markets ran out of steam at the start of this year, what is the danger of a repeat?”

“With the Vix at 13, the Crossover CDS index back under 300, emerging market spreads falling and the S&P making a new high yesterday, it’s hard to imagine imminent collapse. The US economy is in better sort0-term shape and faces a fiscal boost. The European economy trundles on, Chinese data are surprising on the upside. Everything suggests that the fed can tighten further and yields rise further, before serious strains appear in markets. Which is a longwinded way of saying that the dollar can fly a little higher before it gets into trouble. We’re comfortable to stay long USD/JPY, and indeed long USD vs. most of Asian FX.”