15 Dec 2015
Previous markets reactions to Fed hikes - Westpac
FXStreet (Guatemala) - Richard Franuiovich, analyst at Westpac explained the evolution of the major asset classes around the last five Fed hike cycles. The analysis builds on prior work looking at the behavior of the USD around past Fed tightening cycles.
Key Quotes:
The USD (in broad TWI terms) typically stalls in the first few months following the onset of a Fed tightening cycle. •
USD weakness in the months after a tightening cycle has commenced is mostly a major currency story. Major currencies typically fare much better against the USD than emerging markets currencies
US equities take on a consolidative tone in the six-to-twelve months following the onset of a tightening cycle.
US 10yr bond yields drift higher in the immediate months after a tightening cycle has begun.
US Baa corporate credit spreads typically compress in the months after the onset of a tightening cycle.
"Commodity prices typically forge ahead in the months after a tightening cycle has begun. With the exception of long term US yields the price action across asset classes – on average a flat USD, flat equities, tighter credit spreads and higher commodities - is consistent with a Fed that is if anything innocuous for markets. That of course brings to mind the notion of both a “dovish hike” and more broadly a ‘dovish tightening cycle”.
One must wonder though how Chair Yellen can pull off a “dovish” inaugural hike. Even if she emphasises gradualism, data dependence and a lower terminal rate the decision to tighten policy be defended and by definition that implies a discussion around the tightening labour market and confidence that inflation is expected to trend toward 2%!
Moreover, the infamous “dot plot” interest rate projections should receive a good airing this week and they convey substantially more tightening (4 +25bp hikes in 2016) than what is discounted into forward curves (2 +25bp hikes in 2016)."
Key Quotes:
The USD (in broad TWI terms) typically stalls in the first few months following the onset of a Fed tightening cycle. •
USD weakness in the months after a tightening cycle has commenced is mostly a major currency story. Major currencies typically fare much better against the USD than emerging markets currencies
US equities take on a consolidative tone in the six-to-twelve months following the onset of a tightening cycle.
US 10yr bond yields drift higher in the immediate months after a tightening cycle has begun.
US Baa corporate credit spreads typically compress in the months after the onset of a tightening cycle.
"Commodity prices typically forge ahead in the months after a tightening cycle has begun. With the exception of long term US yields the price action across asset classes – on average a flat USD, flat equities, tighter credit spreads and higher commodities - is consistent with a Fed that is if anything innocuous for markets. That of course brings to mind the notion of both a “dovish hike” and more broadly a ‘dovish tightening cycle”.
One must wonder though how Chair Yellen can pull off a “dovish” inaugural hike. Even if she emphasises gradualism, data dependence and a lower terminal rate the decision to tighten policy be defended and by definition that implies a discussion around the tightening labour market and confidence that inflation is expected to trend toward 2%!
Moreover, the infamous “dot plot” interest rate projections should receive a good airing this week and they convey substantially more tightening (4 +25bp hikes in 2016) than what is discounted into forward curves (2 +25bp hikes in 2016)."