CRB Fundamental Market Service
Busy week results in new post-election lows in the dollar and T-note yields

The markets had a busy week with the bottom line being a more dovish slant on Fed policy, which helped push the dollar index to a new 2-3/4 year low and the 10-year T-note yield to a new 10-month low. Meanwhile, EUR/USD on Thursday closed at a 2-3/4 year high after ECB President Draghi in his post-ECB-meeting press conference failed to put up much of a protest to the strong euro.

The odds for a Fed rate hike by this December fell to 38% on Thursday, down from 54% just a month ago, according to the federal funds futures market. The market is currently discounting only one rate hike over the next 15 months (through Dec 2018), which is far more dovish than the Fed-dot forecast for one more rate hike in 2017 and three rate hikes in 2018.

The market has taken a more dovish view of Fed policy in part because of hurricanes and the economic fall-out. Just a week after Hurricane Harvey caused devastating flooding in Texas, Hurricane Irma is set for a direct hit on Florida this weekend. Damage assessments from Irma are already upwards of $100 billion depending on where it hits. Two more hurricanes have already formed in the Atlantic.

Aside from hurricanes, Fed Vice Chair Stanley Fischer unexpectedly resigned this week effective in October, leaving President Trump with another Fed vacancy to fill. Mr. Trump now needs to appoint a Fed Chair, a Fed Vice Chair, and two Fed governors to fill vacant positions. The markets expect Mr. Trump to fill the Fed positions with generally dovish members who favor banking deregulation.

The Fed is mainly expected to delay its next easing move as Fed officials express concern about low inflation figures. In addition, the ECB at this week's meeting deferred a decision on tapering its QE program, which kept ECB policy in a dovish light and supported bund and T-note prices.

On the bearish side, T-notes saw reduced safe-haven demand this week after the unexpected agreement for a 3-month debt ceiling suspension and continuing resolution. That eliminated the near-term threat of a Treasury default and U.S. government shutdown and perhaps boosted the odd for a tax cut.
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