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Market Comment – Fed rhetoric further fuels the dollar



  • Dollar extends recovery on Fed commentary

  • But probability for another hike remains low

  • Wall Street gains as Treasury yields slide

  • Oil prices tumble on China woes and OPEC exports

Fed officials keep additional hikes on the table

The US dollar continued recovering against all the other major currencies on Tuesday as several Fed officials reminded investors that the door to further hikes remained open.

Fed Governor Christopher Waller said yesterday that the 4.9% GDP growth rate for Q3 was a “blowout” performance that deserves watching closely, while Governor Bowman said she took the number as evidence the economy not only “remained strong,” but that it may have gained speed as well. Although Waller did not specifically refer to whether additional hikes are needed or not, Bowman said that the growing economy may indeed require a higher policy rate.

Chicago Fed President Goolsbee and Minneapolis Fed President Kashkari repeated that the rise in market-based interest rates likely represents a tightening of financial conditions, but neither ruled out additional hikes.

Unconvinced investors await Fed Chair Powell

Yet, despite the recovery in the dollar, investors were not largely convinced that another hike may be on the table. This is evident by the fact that in contrast to the dollar, the 10-year Treasury yield slid yesterday, and by the implied path derived by Fed funds futures, there is only around a 15% probability for one more quarter-point rate rise and around 90bps worth of rate cuts by the end of 2024. The slide in the yields may have been due to a solid auction of $48bn in 3-year notes with auctions of the 10- and 30-year bonds due out later this week.

What prompted investors to add to their cut bets was Friday’s disappointing US employment report, but looking at the broader economic performance, there is nothing justifying so many basis points worth of rate reductions. Therefore, should US growth-related data continue to point to a resilient economy, there is ample room for upside adjustment and a further recovery in the US dollar.

Today, although there is no top tier US data, the spotlight is likely to fall on a speech by Fed Chair Jerome Powell. If he echoes his colleagues’ remarks that following the stellar economic performance in the third quarter, the chance for higher rates remains firmly on the table, or if he highlights the ‘higher for longer’ mantra, the dollar is likely to extend its gains.

Stocks and yields take Fed talk with a grain of salt

Wall Street ended Tuesday’s session in the green, with the Nasdaq recording the most gains, as the pullback in Treasury yields may have helped high-growth mega cap stocks that are usually valued by discounting free cash flows for the quarters and years ahead. This suggests that only dollar traders took remarks by Fed officials seriously, and it remains to be seen whether Powell will be able to lift yields today, something that could prove negative for stocks.

After Powell, the next big test for the markets closely linked to expectations about the Fed’s monetary policy path may be next week’s inflation data for October. The new estimate of the Atlanta Fed GDPNow model, which comes out the day after the CPI data could also be worth monitoring. Currently, the model projects a 2.1% growth rate for Q4.

Oil falls more than 4% after Chinese data

Oil prices fell yesterday, with WTI crude oil tumbling more than 4% and hitting its lowest since July. This may have been due to mixed Chinese data during the Asian session yesterday, which although suggested some improvement in domestic demand, they continued pointing to persistent risks. Imports snapped 11 straight months of declines in October, rising 3.0% y/y, but exports shrank 6.4% y/y, faster than a 6.2% decline in September.

A joint decision by Saudi Arabia and Russia to continue with their additional voluntary output cuts until the end of the year could have otherwise proven positive for the black gold, but a recovery in OPEC exports by about 1 million barrels per day (bpd) since their August low suggests that there may still be much supply to be absorbed by oil-consuming countries.


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