If A Rate Hike Is Expected, Why Aren’t Rates and the Dollar Higher? March 3, 2017

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If A Rate Hike Is Expected, Why Aren’t Rates and the Dollar Higher? 

That’s a fair question to ask, given two weeks ago there was no expectation of a May rate hike. Then, a week ago, there was no expectation of a March rate hike. Now, a March hike is fully expected.

Yet despite that relatively quick shift, as mentioned the Dollar Index still isn’t materially above 102, and still not close to the recent 103 high. Meanwhile, the 10-year yield is still decently below 2.60%.

The reasons we haven’t seen greater rallies in the dollar or yields are twofold.

First, a rate hike is not a foregone conclusion because of the jobs report next Friday. If it’s disappointing then a May hike makes more sense.

Second, the market still doesn’t believe the Fed is materially more hawkish. So, even if the Fed hikes now, the market still expects just three hikes the remainder of the year, which is what the Fed said in December.

The point is, the currency and bond markets still haven’t fully priced in a March hike yet, nor have they accepted the existence of a “hawkish.” Fed. However, if that jobs number is strong I believe we’ll see further upside in the dollar and yields.

But the big jumps in both will come when the market realizes the Fed is more hawkish than it currently expects, and that likely won’t happen until we see more inflation or proof of actual fiscal stimulus.

Regardless, barring an economic set back the trend higher in the dollar and rates is close to resuming, and investors should be positioned accordingly.

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