What The Market Says The Fed Will Do

| About: SPDR Dow (DIA)

Summary

Tomorrow, the FOMC will hold its latest rounds of meeting to discuss the future of interest rate policy.

I like to survey the landscape and see what the collective market thinks about the Fed's likely move.

If the Fed was supposed to be raising rates, why are yields falling and the US Dollar weakening?

Today, the FOMC will hold its latest rounds of meeting to discuss the future of interest rate policy. It has been my opinion since the beginning of the year that Fed would not raise interest rates in 2016. To this point, I have been correct. However, although slow GDP growth, a sub-par May Jobs report and slew of other weak economic data, anything is possible.

Typically, during times of events like this, I like to survey the landscape and see what the collective market thinks about the Fed's likely move. I'm going to start by looking at the Treasury markets. If we look at the charts below, before the Fed rate hike in December, ten-year rates were trading around 2.25%, as of 6/13 they are trading 1.62%, a decline of over 60bps, since the hike. Amazing, right? Aren't we suppose to be in a rate tightening cycle? The long end of the bond market says no.

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In fact from looking at that chart above, I would not be the least surprised if rates on the long end continued moving lower.

The currency market is another place I like to turn to when thinking future interest rate policy. For this, I usually, just proceed to look at the Euro and the Yen. I would not use the Pound at this point only because there are political factors that in place which can distort the results. Back in December around the rate hike, the Euro was trading in 1.09 - 1.10 range vs. the dollar. Follow the rate hike the Euro strengthen against the dollar. All of this is in the face of the ECB going to negative rates and increasing the amount of QE.

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Turning to the Yen, it doesn't seem all that different. In December, the Yen was trading in 120 range vs. the Dollar. Today it trades around 106. Again, same thing negative rates and QE. In fact, the government has also announced rounds of fiscal stimulus were on the way as well, which means even more printing of money.

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It all leads to the question. If the Fed was supposed to be raising rates, why are yields falling and the US Dollar weakening? My interpretation is that it could be two things. One is that there a hunt for yield around the world. Sovereign rates are at near zero or below zero in most of Europe and Japan. That leaves investors in these areas looking for yield that is "safe". That brings them to buying our Treasuries. The second and more probable reason these two events are happening are that the market does not believe the Fed will be raising rates anytime soon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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