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The USD gains on Yellen’s hawkish speech
The contraction in US durable goods in August has just been another hit for the Fed hawks, many now silently sitting on the side-lines and reviewing the feasibility of a Fed rate hike before the end of the year. Judging from the deepening negative trend in the US and global macro-metrics, the Fed are still very unlikely to move towards tightening in 2015. 

Yet seeing that the Fed Chair Yellen is firmly perched on a hawkish stance, there is certainly something preparing for the end of this year. Judging from the FOMC Chair Yellen’s speech yesterday, the first Fed rate hike may happen by December and could rather be a relief for the entire market. Both the G10 and emerging markets are running out of patience regarding the lack of visibility on Fed’s road map.

A potential status quo in December could cost the Fed dearly, in terms of market volatility and financial instability and even credibility. For now, despite record lows in the likes of the Brazilian Real, the South African rand and the Turkish lira, the market is pricing in a near 50% probability of a move in time for Christmas.

Due today, the US second quarter growth data could see a downside revision. The slowdown in exports but also the accumulation of business inventories warns that lethargy will soon knock at US’ door. The recent experience has proven that massive cash injection in the financial system has not been an efficient solution. Therefore the positive correlation between the risk appetite and the life expectancy of low rates wanes significantly.

Investors are craving for a clearer picture and the marginal utility of an extra month of cheap Fed liquidity decreases. Stock prices are heading south even if the Fed is willing to leave the cash tab open for some more time.

The commodity market has been the first to throw in the towel; the artificially puffed up stock market has however a longer way to run south. 

The US sovereign yield curve flattened by more than 10 basis points on the back-end since the FOMC decided to keep its policy rates unchanged at the September meeting. Inflows to the US sovereign bond market continue as if there were no tomorrow. According to a UBS report, the treasury AUM was boosted by about 12% over the past month. The capital flow dynamics suggest that the US treasury market is still perceived as the best place to be parked.