The USD started the week on a strong note, with markets aggressively pricing in a Fed rate hike at Wednesday’s FOMC meeting. However, the DXY Index’s rise petered out at 99.74 at the start of the US session, when focus returned to the 30Y US Treasury yield re-testing the 5.38% threshold, and the 10Y yield hitting 5% for the first time since October 2023. What sets this FOMC apart from previous meetings is the Treasury Department’s standoff with bond vigilantes over the federal debt amid energy-driven inflation concerns.
We remain cautious about this pre-FOMC USD rally. The market is also pricing in other rate hikes that match those of the Fed, without the burden of the US midterms.
The market has already priced in a Fed hiking cycle amid the risk of a hold decision. Two heavyweight Fed officials indicated a willingness to hold rates before the blackout period. Fed Governor Christopher Waller wanted more evidence that the disinflationary process has stalled before supporting further rate hikes. New York Fed President John Williams reckoned higher bond yields reflected economic strength and served as a form of tightening, providing the Fed room to pause and assess. Then again, three regional Fed Presidents – Lorie Logan (Dallas), Beth Hammack (Cleveland, and Neel Kashkari (Minneapolis) – dissented against the pause in July, voting for an immediate hike.
The release of the updated Summary of Economic Projections and the dot plot is also expected to be a market catalyst. Fed Chairman Kevin Warsh will likely refrain from submitting his own dot again given his determination to end forward guidance and keep all options open for the October and December FOMC meetings. This leaves the market paying closer attention to how the remaining 18 FOMC participants will adjust their forecasts in light of the recent upside surprises in nonfarm payrolls and CPI data. The market will base its assessment on whether there are now more or fewer than the 9 members who voted in June for at least one hike for the rest of the year.
Quote of the Day
“Ignorance more frequently begets confidence than does knowledge: it is those who know little, and not those who know much, who so positively assert that this or that problem will never be solved by science.”
Charles Darwin
Today in history
On September 15, 1835, the HMS Beagle arrived at the Galápagos Islands during its famous expedition led by Charles Darwin.
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