Fed Lift Off in 2017

It’s March 2017, and the Trump rally still has not shown any signs of slowing. Despite a lacklustre address to congress, in which he was once again light on policy, equity markets continued to push record highs, with the Dow topping 21k for the first time ever.

Elsewhere the dollar has also rallied. It’s unclear how this will play out, given President Trump’s dislike for the strong dollar, but as it stands, a rate hike during the Fed’s march meeting is not just in play, but almost a necessity.

As yields have risen, the price of the US 10 Year has tumbled.

 

T Notes Price Action 2017
T Notes Price Action 2017

Source: tradingview.com

 

Studying the price of the US 10 Year Treasury Note, gives you a good feel for the markets relationship with the Fed and risk in 2017.

Prices rallied initially, as the brakes were put on future rate hikes. Price oscillated around 125’00 for some time, and generally remained buoyant above the 123’20 handle.

As the potential for further rate hikes seemed to ease, and the dollar weakened with commentary from members of the Trump cabinet, T-Note prices finally broke above 125’00, eventually hitting a high for 2017.

Some of the more technically minded may see the second high as part of a double top. This very well could be the case, as the technical have coincided with some strong fundamentals. As the economic data for the US continues to print strongly, and equities continue to run with the Trump trade, the Fed have stepped up their hawkish rhetoric.

The result has seen traders piling into the dollar to price in a March rate hike.

With 10 Year yields currently 2.45%, the prospect of another increase may not yet cause long equities traders to jump ship. But the Fed seem to be positioning themselves for the year ahead, which may yet continue to over deliver on inflation – particularly in the US.

Whether or not equities can continue as they are remains to be seen, as at some point, the rally will need to correct itself. But for now, short on the US 10 Year seems like a strong play, but as always, it will be essential to watch the data points and Fed speakers.

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