From Bloomberg's Richard Breslow
Today we hear from 4 A-list Fed speakers. With the case for a rate rise in December being obviously laid, these speeches will be parsed as closely as any religious tractate. First up is Governor Lael Brainard who sent shock waves last month as she urged caution and patience. Getting her back on board with the hawkishly shifting FOMC and avoiding a potential dissenting vote from a governor will be a Yellen priority. Dudley on income “variance”, a euphemism for “inequality”, is also timely as Fed critics put much blame for this problem on Fed policies, i.e. rates too low, too long. Yellen and Fischer will be pushed on how low the bar is to a hike.
The December meeting is 6 weeks and 2 non-farm payroll reports away. Jaded markets, so used to a central bank eager to support asset prices and encourage risk taking, are only at the very beginning of discounting a rate rise. Leaving it to the last minute is a very risky strategy, borne from the very policies and communication challenges the Fed is now trying to change.
U.S. Treasuries are the first market paying some attention. Yields have backed up but are well short of the June and September jumps. We have seen these levels so many times that there are “major” technical levels every 10bps. These technical levels don’t take into account a rate rise and emerging-market central bank reserve selling that will only increase if the Fed goes
U.S. dollar bulls are remarkably timid. Not your father’s FX market. Fed is tightening, the rest of the world is easing. Emerging market economies are weak. I’m not sure what is the fear of punching below EUR/USD 1.08. All in good time
Equities are in denial. Stock buybacks at all time highs and discounting future earnings at zero rates is an odd long- term strategy at this point.
If the Fed gets what it seems to want in December, markets will look back on this and wonder what they were thinking.
