Ahead of yesterday evening’s FOMC Minutes, the most commonly watched US equity index – the Dow Jones Industrial Average – was trading up around 150 points. When fears of a more aggressive path for US rate rises were not confirmed by the Minutes, the index added another 100 points to a high of 25,250. By the close of business in New York, however, the market had fallen over 400 points to close down -166 and earlier this morning it shed another 100 points from that level. The US Dollar continues to trade pretty much inversely to stock markets and has thus extended its winning streak into a fourth day. Back on Friday, the Dollar’s index against a basket of major currencies stood at a 3-year low of 87.95. It closed last night at 89.75 and overnight in Asia has traded up to 89.85; its highest in almost 10 days. The DJIA is down almost 700 points over the same period, whilst US 10-year bond yields have risen to a fresh 4-year high of 2.94%.
There had been some talk that the Minutes might be used to steer the market towards expecting four rate hikes this year, rather than the median of three which had been signaled in the December ‘dot-points’ and the 2.82 hikes which were reflected in interest rate pricing. This didn’t really happen. For sure, “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate" and FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook. A number of FOMC participants indicated that they had raised their forecasts for economic growth in the near-term vs their December estimates and the impact of recent tax cuts "might be somewhat larger in the near term than previously thought''. Nevertheless, "Participants generally noted few signs of a broad-based pickup in wage growth in available data" and some participants saw “an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient".
Having spent three days eagerly awaiting the Minutes, the reaction in equity markets suggests they were quickly dismissed as ‘out of date’ and didn’t properly reflect subsequent incoming data on wages and inflation. Indeed, Goldman Sachs senior US economist recorded a podcast last night saying, “let me consider our four-hike scenario as the baseline here: I would say that I see risks around our forecast as two-sided... I doubt that they would hike at a non-press conference meeting in the first half of this year; it just doesn’t seem necessary yet. But by later in the year, it's certainly possible that they wind up adding another one and do five hikes for the year.” Yesterday afternoon, the market was pricing 2.8 rate hikes for 2018. If it now has to consider 5, then it’s little wonder that stocks are lower and the USD is firmer this morning; almost 2 points above its recent 3-year low of 87.95.