Fixed income investors are healing their wounds while U.S. equities and dollar bulls are celebrating new highs during the Thanksgiving holiday break. Since Donald Trump's presidential victory, yields on 10-year treasury note rose by more than 26% and the longer term 30-year maturities surged 15% taking borrowing cost on 30-year mortgages to 4.03%, the highest levels in 16 months.
S&P 500 and Dow Jones managed to extend their streak of record high closing for the third consecutive day, with both benchmarks sitting above key psychological levels of 2,200 and 19,000. Meanwhile the dollar continued to outperform its major currency peers with the index rallying to a new 13-year high.
Yesterday’s Fed minutes showed that members agreed that the case for an increase in policy rate had continued to strengthen, but more interestingly some members noted that a rate hike in December is needed to preserve FOMC’s credibility. However, this shouldn’t be surprising to markets given that speculators already priced in a close to 100% chance for a December rate hike even before the minutes were released, suggesting that dollar bulls are looking beyond next month’s Fed decision. Moving forward, it’s going to be about the pace of tightening in 2017 and 2018, and this will determine whether the dollar will continue to march higher.
The University of Michigan’s final consumer sentiment reading for November rose to a 6-month high and showed that 37% of households expect their personal finances to improve next year. Will this translate into higher consumer spending, higher wages, and higher inflation?
If the answer is yes, then the Fed will need to tighten at a faster pace so that they will not fall behind the curve and this justifies a continuation of the dollar bullish trend. From a technical stand point, the dollar index is currently hovering around the 61.8% retracement from 2001 highs at 121.02 to 2008 lows at 70.70 and requires a clear break out of 101.90 to validate a further push higher.
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