The Fed is becoming more confident in recovery
Michael Stanes, Investment Director at Heartwood Investment Management, comments on how the US Federal Reserve is becoming more confident in the US recovery and how shrinking US liquidity is starting to be realised in price behaviour:
“The US Federal Reserve is clearly becoming more confident in the US recovery story. Interpretations of Fed commentary are conjecture, but what has been interesting over the last month has been the discernible shift in market perceptions of where Fed rates are likely to be over the next one to two years. “The lower for longer” view of the world is starting to be challenged, albeit in a nuanced way. The US treasury curve has entered a bear steepening trend since the start of this month, reversing the flattening trend that has been the predominant pattern this year. Most of the underperformance has been in the intermediate part of the curve, where the 10-year treasury yield has risen nearly 30 basis points. The other indicator of shifting US rate perceptions is the reascension of the US dollar.
“The widening interest rate differential is supporting its appreciation against the Japanese yen (+4%) and the euro (+1.6%) in the month-to-date. However, more significant has been its rise against emerging market and commodity currencies (except Canada). The Australian dollar, for example, has fallen 4% against the greenback in the month-to-date. Clearly, the perception of shrinking US liquidity is starting to be realised in the price behaviour of those assets that are most sensitive to Fed policy moves. Fed tapering is likely to end in October and that could present a new phase for financial markets. Market volatility has laid eerily dormant in recent months, but as Fed rate rises draw closer, investors across all assets will have to tread carefully.”