The light news stream has spurred some position squaring by short-term momentum traders. This is giving the dollar a somewhat heavier tone, and weighing on European equity markets. European bonds and Treasuries are little changed, though slightly firmer.
The general narrative of the dollar's firmer tone is that the market feels more confident that the Fed will raise rates this year. We have sketched out a similar view, yet it is important to recognize that this is not fully reflected in market pricing. Specifically, the healthy June employment report in early July and Yellen's remarks have produced a net 1.5 bp increase in the implied yield of the September Fed funds contract since the end of June. It now implies 18 bp effective Fed funds rate in September. That is a five bp increase from the current average of 13 bp.
The FOMC dot plot shows a slight majority of members saw scope for two hikes this year, which seems to imply a September hike. The recent Wall Street Survey found over 80% of economists expected a hike then. Yesterday's the Fed's Bullard suggested a 50/50 chance of a September hike. The pricing in the futures market suggests the market is still not convinced.
Next week's FOMC statement may show the economy is evolving in line with Fed expectations. The first look at Q2 GDP will also confirm a modest recovery after the stagnation in the first quarter. There are still two employment reports the FOMC will see before making the decision in September.
Minutes from the recent Bank of Japan and Reserve Bank of Australia meetings were released. There is an important take-away from each. From the BOJ, the key point is that officials are still voicing confidence that inflation is trending in the right direction. This, especially in the context of the recent downward revision in the central bank's multi-year inflation forecasts, suggests that there is no urgency about easing further. Many economists expect the low inflation to prompt the BOJ into expanding its asset purchases. The expectations originally for mid-2015 has been pushed into the second half of the fiscal year (beginning in October), but even this seems somewhat less likely.
