Trump Turmoil Takes Two Rate Hikes Off The Table

I am surprised Fed futures traders still firmly expect a rate hike from the U.S. Federal Reserve in June.

Source: CME FedWatch Tool

After  the stock market sell-off in the wake of more Trump turmoil, the market pegged the odds of a June rate hike from the U.S. Federal Reserve at 64.6%. Above 50% means that more likely than not, the rate hike will occur in June. The odds bounced right back in the next day of trading to 73.8%. This resilience in June expectations is surprising given the viciousness of the selling and the accompanying drop in long-term interest rates. The drop in rates caused the iShares 20+ Year Treasury Bond ETF (TLT) to gap up to a 1.4% gain on the day.

The latest rally in iShares 20+ Year Treasury Bond ETF (TLT) has yet to make a new high for 2017


Despite all the accompanying drama on the day, TLT did not make a new high for 2017. While the turmoil was not enough to punch interest rates past the trading range or unseat June expectations, the turmoil DID take two rate hikes for 2017 clear off the table. After the Fed’s pronouncement on monetary policy on May 3rd, the odds of two rate hikes by December stood at 55.8%. After the day of Trump turmoil, those odds tumbled all the way to 37.6%. Futures traders recovered some of their confidence on the next day, but the odds are still well below 50%.

The odds of two rate hikes by the end of this year dropped well 50% thanks to the Trump turmoil. The odds are similar even for January, 2018.

Source: CME FedWatch Tool

It is likely the plunge in odds for two rate hikes helped grease the skids for the U.S. dollar (DXY0) and confirmed a 200DMA breakdown. The dollar bounced back along with the odds of rate hikes.

At its intraday high, the U.S. dollar index managed to reverse all its losses from the previous day’s sell-off. The 200DMA breakdown remains well intact.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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