The Fed’s three-hike pipe dream - Swissquote

Arnaud Masset, market analyst at Swissquote, argues that the market mispriced the tightening path beyond the March rate hike and when Janet Yellen adopted a dovish tone and wording during the press conference, investors quickly caught on that the three rate hikes promised for 2017 were, in fact, a pipe dream.

Additional quotes

"As widely expected, the Federal Reserve increased borrowing rates by 25bps to 0.75%-1%. This is the second interest rate lift in four months and nobody got it wrong. So, no surprise here, however the greenback plunged sharply during Yellen's press conference with rates collapsing along the yield curve. Monetary sensitive 2-year treasury yields as well as the 10-year slid 9bps to 1.30% and 2.48% respectively. In the FX market, the single currency hit 1.0746 against the dollar as investors unwound their long USD positions. Interestingly, the disappointing defeat of Geert Wilders’ Freedom Party provided an additional boost."

"Yes, the US economy is still in recovery in that growth is positive, however dark clouds have begun to gather on the horizon. One of the most disconcerting of all - as also mentioned in our report yesterday - is the negative trend in real wage growth. In February, data showed that real wages contracted 0.5% compared to a year ago. This is a major issue as consumer spending accounts for roughly 70% of the US GDP. Moreover, less disposable money for consumers means less price pressure, which translates into falling consumer prices, which ultimately means that the Fed will have to increase rates slowly if not taking a break during the process altogether."

"The greenback is staring down the barrel of some complicated times ahead as investors slowly switch to risk-on mode and move towards higher yielding assets. In the short-term, EUR/USD will continue to suffer from the political uncertainty stemming from the French election. CHF and JPY have room for further appreciation against the USD."