Hawkish Fed Vice Chairman Adds Strength To These ETFs

Though the latest Fed minutes lacked spark, Fed Vice Chairman Stanley Fischer filled that gap on Sunday when he suggested that the Fed is approaching its goals of “maximum sustainable employment and an inflation rate of 2%’. Fischer’s comment clearly indicates that he is in favor of further interest rate hikes this year (read: ETF Winners Following Fed Minutes).

While the strength inthe labor market is known to all, the real question pertains to inflation. In its July meeting, the Fed indicated that inflation in the economy has stalled and is likely to stay subdued in the near term.

However, it would pick up in the medium term as energy prices recover from their rock-bottom levels and the labor market gains more traction. Perhaps, the recent recovery in the oil patch fueled hopes of stronger inflation in the coming days (read: Oil Again in Bull Market: 4 Country ETF Winners).

As per Fischer, the core measure of the personal consumption expenditure index is 1.6%, which “is within hailing distance’ of the central bank’s 2% goal, as per an article published in MarketWatch.

Investors should also note that the July Fed minutes showed a divide among the Fed officials. While one group views the U.S. economy as sturdy enough to digest a rate hike, the other seeks further evidence of economic well-being.

With these latest comments, Fischer joined the band of New York Fed President William Dudley and San Francisco Fed President John Williams, who have also been vocal about a possible Fed hike in the last couple of days.

In his dialog, Fischer also hinted that it is not possible for the Fed to sort out every U.S. economic issue. To solve problems like low productivity growth or look for long-term upliftment, more active fiscal and regulatory policies are also needed, as per Fischer.

September Hike: A Reality?

Now it remains to be seen if it is truly the time for a Fed rate hike. Only Fed chief Yellen can give clearer cues in the Jackson Hole, Wyoming, meeting, where central bankers from around the globe will meet from August 25.

The odds of a Fed rate hike by this yearend are about 47% lately, according to data assembled by Bloomberg. The possibilities of a September move are 20%.

ETFs to Cash in on the Recent Trend

Buy Dollar ETF

Dollar ETF PowerShares DB US Dollar Bullish Fund UUP gained about 0.4% on August 19. Goldman Sachs (NYSE:GS) also expects no further material plunge in the U.S. dollar. Per the brokerage firm, a dovish Fed is already reflected at the current level. The U.S. currency is expected to firm up to $1.09 per euro and 105 per yen by this yearend, going by the median forecast of analysts surveyed by Bloomberg.

Apart from UUP, WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU is another fund that is likely to play the hawkish comments by a few Fed officials (read: 3 Excellent ETFs to Play the Dollar Surge).

Buy Inverse-Yen ETF

Ultrashort Yen YCS which measures daily investment results that reflects twice (200%) the opposite of the U.S. dollar price of the yen. YCS added over 0.4% on August 19. Along with dollar strength, yen’s drop boosted the fund. The buzz is that the BOJ indicated "sufficient chance" of further easing next month, especially after the subdued July inflation data (read: Best Performing Currency ETFs of 1H16).

Short Treasury ETF

U.S. sovereign bond prices recorded losses on the Fischer comments while the yield on the 10-year U.S. Treasury note jumped to 1.58% on August 19 from 1.53% recorded the day earlier. Treasury two-year yields rose to the highest level in two months. Yield on the two-year U.S. Treasury note spiked to 0.76% on August 19 from 0.71% the prior day.

As bond prices declined, ProShares UltraShort 7-10 Year Treasury (MI:PST) , UltraShort Barclays (LON:BARC) 20+ Year Treasury ETF TBT and Direxion Daily 20+ Year Treasury Bear 3x Shares ETF TMV added about 0.7%, over 1.1% and over 1.5%, respectively, on August 19.

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