Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a U.S. recession.
Gundlach, who oversees more than $101 billion at Los Angeles-based DoubleLine, said U.S. economic data support a rate increase as soon as the next Fed policy meeting on March 14-15, and further rises this year, after a series of false starts in 2015 and 2016.
“Confidence in the Fed has really changed a lot,” Gundlach said on an investor webcast. “The Fed has gotten a lot of respect with the bond market listening to the Fed” now that economic data support the tough rhetoric from Fed officials.
New York Fed President William Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street and who generally spends a couple of hours a week planning policy with Fed Chair Janet Yellen, played a key role in orchestrating the messaging of a March rate hike.
Stocks inched upward Friday after remarks by Federal Reserve Chair Janet Yellen pointed to a rate hike later this month.
The Dow and S&P 500 posted fractional gains. The blue chips barely finished higher on the day, up 3 points and staying above 21,000, ending at 21,005.71.
Climbing 0.2% was the Nasdaq composite, to 5870.75.
“At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in a 1 p.m. ET speech at the Executives’ Club of Chicago.
While Yellen couched her remark in conditional terms that depend on economic data, she preceded it by citing a job market that has been “strengthening” and inflation that has been “rising toward our target” of 2% annually.
Several other Fed officials in recent days have indicated the Fed’s policymaking committee is likely to raise its benchmark short-term rate at a March 14-15 meeting.
While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the US encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE, delaying indefinitely any expectations for a return to a “normal” balance sheet.
As a reminder, as of this month, the duration of the latest expansionary cycle – as defined by the NBER – has reached 93 months, surpassing the 92 months of the 1982-1990 cycle, and is now the third longest in history. Should the cycle persist for another 27 months, or just under two and a half years, it would be the longest period of “economic growth” in history.
The cost of funding for your average joe, average corporation, and average swaps trader, surged overnight. 3M Libor rose by the most since Dec 2015 (Fed rate hike) to the highest level since April 2009.
Biggest jump since the fed rate hike in Dec 2015…
As Reuters reports,the cost for banks to borrow funds in U.S. dollars surged by the most since December 2015 on Wednesday, a day after a series of Federal Reserve officials jolted short-term interest rate markets with talk of a near-term rate rise.
U.S. 3-month Libor was set near an eight-year high early on Wednesday at 1.09278 percent compared with 1.064 percent on Tuesday. The 2.878 basis point rise was the largest since Dec 17, 2015, the day after the Fed’s first rate hike following the financial crisis and the Great Recession.
The jump comes as short-term rate markets are rapidly repricing the risk that the U.S. central bank may deliver another rate increase as early as mid-March, when its monetary policy committee next meets.
In recent days a clutch of Fed policymakers have spoken about the case for a near-term rate hike becoming more compelling in the aftermath of the election of Donald Trump as president and a Republican-controlled Congress intent on pursuing an aggressive pro-growth economic agenda.
The latest voices to argue that case came on Tuesday, when both the influential heads of the New York and San Francisco Federal Reserve banks signaled they are concerned about waiting too long to press rates higher.
The dollar hit its highest level in more than six weeks on Wednesday morning, amid a sharp increase in bets that the US Federal Reserve will raise interest rates this month.
The dollar index hit 101.78 on Wednesday morning, its strongest level since January 12th and a 0.3 per cent rise on the day, following hawkish comments from an influential member of the Federal Reserve’s policy-setting board.
The probability that rates will rise when the Federal Reserve meets this month shot up from 50 per cent to 80 per cent yesterday after William Dudley, head of the New York Federal Reserve, said that the prospects for adding to the December 2016 rate increase had become “a lot more compelling”.
His comments helped the dollar to overcome a lacklustre reaction to President Donald Trump’s first speech to Congress last night, which outlined plans to ask for $1tn in infrastructure spending – which would be a boost to the US economy – but was lacking in detail some investors had hoped for.
The rise in the dollar sent the pound to its weakest level in more than three weeks at $1.2348. The US currency was up 0.7 per cent against the Japanese yen at Y113.5 while the euro fell 0.3 per cent to €1.0544.
As we previously noted, while speculatrs had been reducing their shorts in Treasury futures, they had added to Eurodollar shorts – pushing their bets on Fed rate hikes to record highs. However, as Bloomberg notes, signals are starting to emerge that traders who built up that heavy short, or hawkish, eurodollar base since the start of 2016 could be starting to throw in the towel on a March Fed rate hike.
CME confirmed that Wednesday saw record volume in fed fund futures of 658.7k contracts, beating the previous record of 613k on Nov. 9, the day after the U.S. presidential election. Over the course of Wednesday’s session, a total of 283k Apr fed funds futures contracts traded, largest single-day volume seen in the contract. Open interest in the contract rose by 109k, suggesting some short covering before the minutes and potential new longs after the minutes.
With President Donald Trump’s litany of executive orders grabbing the limelight, investors turn their attention back to central banks and economic data next week.
Here’s what to watch in the coming days.
The minutes of the Federal Reserve’s December monetary policy meeting showed that the central bank could be forced to lift rates higher than expected if Congress passes Donald Trump’s economy-boosting tax cuts. So, when the Fed meets next week investors will be watching the Federal Open Market Committee’s statement for the Fed’s view on the US economy and inflation.
Economists widely expect the central bank will leave interest rates unchanged, noting that the absence of a press conference with Fed chair Janet Yellen leaves little room for major shifts in policy. “The February FOMC meeting should come and go with little market implications,” Tom Porcelli, economist at RBC Capital Markets, said. “The Fed is likely to continue to strike a positive tone on the economy and they may upgrade their inflation characterization toward a slightly more hawkish slant in the wake of headline CPI now breaching 2%.”
Meanwhile, the Bank of Japan’s meeting next week marks the one-year anniversary of its adoption of negative interest rate policy. The central bank is not expected to change its policy but it will provide updates on economic growth and inflation.
“Next week’s BoJ meeting should reveal a resolute central bank in its yield curve control framework,” Mazen Issa at TD Securities, said. “We expect the BoJ to be side-lined on all fronts. Speculative ‘taper talk’ is premature though we think this dynamic will need to be reassessed in the coming months.”
Elsewhere, the Bank of England is also expected to leave policy unchanged and update its forecasts as it unveils the inflation report. Economists expect the BoE to maintain a neutral stance on policy.