Theme of the Week: Fed speakers may spur hawkish excitement

A constructive US labour market report is likely to sustain the positive USD sentiment going into next week; the combination of modest job gains (+156k) and strong wage growth (+2.9% YoY) was enough to drive both short- and long-term US rates modestly higher, while equity markets remained unthwarted. Still, this jobs report was more a reconfirmation of expectations for two 2017 rate hikes, with the next moves currently expected in June and December.

Markets remain unconvinced over the prospects of an earlier March rate hike (ING’s base case) and we attribute this to a number of factors: (i) prior Fed cautiousness; (ii) Trump fiscal policy uncertainty and (iii) sub 2% headline US inflation. But all three headwinds could fade, and quite soon. We wouldn’t be surprised to see some hawkish Fed talk this week, with the intention of preparing markets for the prospects of a 1Q17 rate hike. Strong US inflation and growth data over the next month will likely see the reflationary uptick in US yields continue and this means a USD buy-on-dips strategy remains attractive.