Stocks Slump And The Dollar Slides As Market Concludes Fed Is Mistaken

Overview: Once again the US equity market failed to hold on to even minimal upticks. The sharply lower close spurred follow-through selling in global equities. Few have been spared the wrath of investors who apparently were disappointed with the Fed and its reluctance to consider stopping the balance sheet unwind. The US benchmark 10-year yield is consolidating yesterday's drop to 2.75%, a nine-month low, while the 10-year German Bund yield is slipping through 25 bp for the first time in 20 months. Italian bonds, often treated as a risk asset, are leading the yield decline in Europe following the agreement with the EC. Sweden's Riksbank surprised the market with a 25 bp rate hike, leaving the repo rate at minus 25 bp and signaling the next hike in H2 19. The BOJ held steady as widely anticipated. The outcome of the BOE meeting is awaited, but no change is widely expected as Brexit uncertainty looks large. The US dollar is broadly lower against most of the major and emerging market currencies. The greenback is at two-month lows against the yen and six-week lows against the euro.

Federal Reserve 

A common narrative holds the Fed responsible for the Global Financial Crisis for fueling excesses by keeping rates too low for too long in the early part of the noughts. Bernanke and Yellen were often dismissed by the commentariat for being too dovish. Yet for at least the last couple of years, the market has been more dovish than the Federal Reserve. 

This was again the case yesterday as the Fed delivered the fourth hike of the year, as the median had indicated was likely to be the case a year ago. It raised the interest on reserves by 20 bp, so the effective cap is 2.40% rather than the top of the target range (2.50%).  The most important changes in the economic projections (dot plot) were the median now sees two hikes next year rather than three and the median estimate neutral rate fell to 2.75% from 3.0%. This risks overstating the case, the average forecast for the neutral rate eased 2.84% from 2.88%.  

The median GDP forecast for next year was shaved to 2.3% from 2.5%, which is still above its assessment of trend growth (1.9% vs. 1.8% in September). The Fed's statement appeared to put emphasis on two potential headwinds that speak to many investors' concerns. By identifying the weakening global growth picture, the Fed recognized that what happens outside the US still impacts it and is determining the appropriate policy. The Fed's statement also indicated that it was monitoring financial conditions, broadly understood to mean more than a euphemism for the stock market.

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Read more by Marc on his site Marc to Market.

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James Hunter 10 months ago Member's comment

God help us!