Morning Minutes

Fed Projections Ignite US Dollar Rally, Commodity Selloff



The main event of yesterday’s flurry of Fed news turned out to be the member projections. Investors appear to have latched on to number of FOMC members calling for 1-2 rate hikes in 2022 to 7 from 4 in the March projection, and the number of members expecting one or more rate hikes by the end of 2023 increasing to 13 from 7.0% from 6.5%, and for 2021 inflation to 3.4% from 2.4%. Although rate increases still appear to be a long way away, investors appear to be thinking at a minimum this reduces the changes of any more stimulus coming and could pave the way for the Fed to start reducing asset purchases later this year. The next potential significant events for the Fed are next week’s bank stress tests which may pave the way for them to resume dividends and share buybacks this summer, and the August Jackson Hole conference, a forum past Fed Chairs have used to hint at monetary policy changes.

The Fed news appears to have its largest impact on the US Dollar which is up 0.5% against the Euro and the Canadian Dollar this morning, and is soaring against precious metals, pounding gold down 4.0% and silver down 5.0% today. It’s also possible that precious metals, traditional hedges against inflation, may be reacting to the Fed’s inflation projection which is significantly lower than the most recent monthly consumer and producer price reports, suggesting that the central bank expects inflation pressures to ease in the second half of the year, perhaps reflecting recent declines in base metal, lumber and grain prices. The bond market has also reacted to the Fed news with the US 10-year treasury note yield popping back above 1.50% yesterday and consolidating gains near 1.55% this morning.

US stocks have been drifting downward at a moderate pact since yesterday’s Fed announcement. Dow futures are down 0.4% this morning, adding to yesterday’s 0.7% decline for the Dow Industrials. Commodities are also taking a hit this morning with WTI crude oil falling 0.6%, copper diving 2.6% and platinum plunging 4.9%.

In economic news today US weekly initial jobless claims were disappointing (412K vs street 359K). In earnings news, homebuilder Lennar beat street expectations ($2.65 vs street $2.36). Tonight the Bank of Japan is meeting.  

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Colin Cieszynski, Chief Market Strategist

Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

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