One of the things we’ve discussed at length in these pages of late is the extent to which markets have begun to do the opposite of what central banks intend. The latest examples include the reaction in the aussie and the kiwi following RBA and RBNZ rate cuts:
Well in what feels like a replay of the April Minutes release (especially considering Bill Dudley’s comments on Tuesday), the July Minutes are out and initially, they felt pretty hawkish. Here are the key bullets via Bloomberg:
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FED OFFICIALS SPLIT IN JULY ON WHETHER RATE HIKE NEEDED SOON
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A COUPLE FED OFFICIALS BACKED JULY RATE HIKE
Ok, so theoretically, stocks should be falling, yields should be rising, and the dollar should be higher. Only that’s not what’s going on. Have a look:
Pretty counterintuitive, right? Basically what that tells you is the market simply isn’t buying it anymore. They’ll always find an excuse not to hike whether it’s lackluster productivity, soft retail sales, global turmoil, etc. Never mind that we’re at full employment. Here’s an excerpt that underscores what we mean:
“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity. A couple of members preferred also to wait for more evidence that inflation would rise to 2 percent on a sustained basis.”
And here’s a look at the across the board dollar selling:
(Chart: Citi)
For his part, Citi’s Steven Englander thinks the market has it right:
“We are not seeing anything like the Dudley comments, at all. Most comments are referring to the near term horizon, and that no one is seeing these as any real source of concern. At this juncture, the market is kind of right. The minutes seem to be consistent with a pretty steady Fed with no urgency to hike for now.”
Finally, here’s Bloomberg’s summary of the reaction:
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Gold bounces and extends to $1,352, from $1,336 just before the Fed July minutes showed members were split on the timing of a rate hike.
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EUR/USD rises as much as 1.1316, having dropped as low as fell as low as 1.1242 ahead of the release in anticipation of a hawkish Fed
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USD/JPY erased gains and turned lower to 100.04 vs 100.66 at 1:57pm
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UST 10Y yield initially extends gains before falling to as low as 1.5385%; it was trading at 1.578% just before the minutes
So if they were hoping to send a hawkish message, they failed. And miserably so.
The next thing to watch will be Yellen’s speech at Jackson Hole later this month, where one can’t help but expect more of the same kind of noncommittal nonsense that we just read in the July Minutes.
And wouldn’t you know it: stocks just turned green.
As Barclays put it on Tuesday: “September with risk to never.”
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