Interest rates games

Yesterday we had San Francisco Fed president Yellen saying that the fed funds rate is "in a vicinity that is rough appropriate", and that the Fed need not keep raising rates until the point where inflation actually turns down. US Treasury Secretary Paulson also came on the wires, repeating that a strong dollar is in the US interest, and that growth is now slowing to a sustainable pace. St Louis Fed president Poole joined in the chorus, saying he felt evenly split about the need for another rate hike at the Fed meeting next Tuesday. Hmm.

Turning to fundamentals, yesterday we also saw the core PCE price index (which excludes food and energy)- the Fed’s favourite key indicator of inflation- grew at the fastest pace yoy in 4 years. Will it matter to the Fed? Tonite, we have the ADP report, and coming this Friday, we are awaiting the NFP game.

As at this time of writing, the market has priced in only 37.8% probability that the Fed will raise 25 bp to 5.5% next week. Should the nfp come in below expectations, we can imagine that probability to be taken off the table. But don’t rejoice yet if you are a Euro bull, because tomorrow we’ll be on alert to what the ECB might say after the much expected 25 bp rate hike to 3% tomorrow.

And while we are on interest rates, BOJ Mizuno spoke today it is wrong to think there will not be more rate hikes this year, while Australia has just raised its rates this morning to 6%.

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