Why You Should Be Nervous About Janet Yellen’s Speech Tomorrow

While virtually all prominent market commentators, most recently Bloomberg’s Mark Cudmore, now seem convinced that the Fed will hike by 25bps on March 15, when just as recently as a week ago the question was June or September, some are still skeptical. One among them is Vincent Cignarella, FX strategist who writes for Bloomberg, who in his daily Marco View piece writes that “March is far from a slam dunk even if officials collectively see three hikes this”, and that the key clue will come tomorrow at 1pm when Janet Yellen speaks, and very well may stun markets who have sent the probability of a March hike up to 90% following recent hawkish comments from uber-doves Dudley and Brainard.

Here is Cignarella explaining why “You Should Be Nervous About Janet Yellen’s Speech”

Foreign-exchange and Treasuries traders may have gotten ahead of themselves.

While it seems obvious based on recent economic data that the Federal Reserve will eventually need to raise rates, Chair Janet Yellen could walk back market expectations on Friday to create padding for risk events ahead of the March 15 decision.

If so, markets appear precariously perched. Dollar-yen has risen around 2.5 percent and the U.S. 10-year yield has climbed more than 16 basis points in just three days.

Short positioning in eurodollars, which are highly sensitive to the path of Fed rate hikes, is near record levels with both real and fast money extending hawkish bets, according to the latest CFTC data.

These moves have been driven by Fed speakers saying this week that rates will need to rise soon. First Fed dated overnight-interest-rate contracts have priced in close to 80 percent odds of a March increase, based on Fed effective rate of 0.66 percent. Other measures of market-implied probability approach 90 percent.

But not everyone is on board. Alan Blinder, former vice chair at the Fed, said on Bloomberg Radio Thursday that Yellen won’t sound hawkish and she will want to leave open the possibility of standing pat in March.

The Fed hasn’t been coy about its intention to hike gradually, so March is far from a slam dunk even if officials collectively see three hikes this year. Don’t forget, the Fed expected to hike four times in 2016, only to tighten once.

Non-farm payrolls on March 10 seems to be the main risk event ahead of the FOMC. While one data set probably wouldn’t alter the tightening trend, it could affect timing.

Another uncertainty is fiscal stimulus. President Trump has yet to offer specifics on tax cuts, trade and infrastructure plans that have helped spur inflation expectations.

Remember, one of the most profitable bets traders could have made in the last two years is that Fed forecasts would be wrong.