The Daily Update - Trump and Yellen comments raise hope

Today the dollar continued its rally along with US equity indices whilst 10-year Treasury yields rose 5 basis points. The DXY Index is now up more than 1.4% so far this week; at 93.4 at time of writing, it is now back to where it was this time last month. Some of this may be due to profit taking from the recent rally in the euro (which is still up around 12% versus the US dollar year to date). The rest of the dollar rally and sell-off in Treasuries stems from hawkish comments from Fed Chair Yellen (and New York Fed President William Dudley) as well as market optimism over the anticipated tax proposal from President Trump later today.

In her speech yesterday at the National Association for Business Economics, Janet Yellen expressed support for further gradual raising of rates - increasing December hike expectations to 70%. Treasury yields rose across the curve but the shorter end continues to perform weaker relative to historic data and 2-year yields at 1.48% are at their highest since 2008 (modified duration is only an equal measure of risk under a level shift in the yield curve which is not the scenario we have been facing over recent years). Part of the reason for longer maturity yields being less vulnerable and less volatile of late is the transient nature of any growth stimulus coming from (potential) tax reforms and such like. Indeed the Longer Term Implied Fed Funds Target Rate (extrapolated from the Fed Dots plot) at 2.75% is now at its lowest ever with five voting members estimating that the long-term target rate is now 2.5% or below. Indeed only 1 of 14 member now believes the longer term target is above 3%, a far cry from even 2 years ago when only 1 member was gloomy enough to vote as low as 3% and the median was 3.5% (0.75% higher than present).

In considering all recent commentary from the Fed it's worth remembering that the higher likelihood of a December rate hike isn’t quite as ‘data dependant’ as it has been in the past. Yellen’s comments and FOMC meeting minutes convey a desire to continue with a gradual path of rate rises DESPITE downward revisions to projections of inflation and the neutral rate.

Yellen’s comments on inflation included: ‘downward pressures on inflation could prove to be unexpectedly persistent’, ‘inflation expectations will remain reasonably well anchored’, ‘inflation has been unexpectedly weak from the model's perspective’, ‘this year's low inflation is probably temporary’. Surmising labour and inflation outlooks she stated, ‘I view the data we have in hand as suggesting a generally healthy labor market, not one in which substantial slack remains or one that is overheated.’ and ‘the notable decline in inflation compensation may be a sign that longer-term inflation expectations have slipped recently.’

Taking this tempered outlook for inflation the possibility of an imminent rate hike should in fact help create stability and confidence in markets. We also expect Trump’s lauded tax reforms will be vastly diluted if not stagnant. He will struggle to get enough support for such unfunded tax cuts, especially with the original healthcare reform bill all but dead in the Senate: now refusing to vote on it. But the markets love such narratives as an outlet for temporary optimism; we, however, don’t yet think there is sufficient evidence yet to fully price in such unlikely growth stimuli into our forecasts.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.