Following the release of the FOMC minutes from last month’s meeting, the consensus narrative that has emerged says that it was dovish because there is a growing worry the reason inflation fell is not simply due to transitory factors. This explains, according to the narrative the dollar’s losses and the stock market rally.

It seems reasonable until one looks closer. The best proxy for Fed expectations is not the dollar or the 10-year yield or stocks. It is the Fed funds futures and the short-end of the coupon curve. The implied yield on the December 2018 Fed funds futures roseone basis point yesterday. The two-year note yield rose half a half a basis point yesterday. The signal is not in the magnitude of the move but direction.

The market has come to accept a December rate hike, just as it had to be led by the hand to recognize the March hike. It has been skeptical of hikes next year. Consider that the effective average Fed funds rate has been 1.16% since June’s hike. A December hike will bring it 1.42%. A hike in 2018 would then lift the effective average rate to 1.67%. The first Fed funds futures contract that has an implied yield at that level is March 2019.

What of the dollar? It had sported a softer profile this week after reversing higher following the US jobs data at the end of last week when in our view, the market had nearly completely discounted a Dec rate hike, and the 10-year yield reached the upper end of its six-month trading range. We thought that the focus would shift back to the ECB from the US employment data.  Perhaps, also contributing to the pullback in US yields are the concerns about the status of tax reform.  

The euro is extending its four-day advance into today’s session. The gains have carried it to the $1.1880, which corresponds to 50% of the drop since reaching almost $1.21 on September 8 and bottoming last Friday near $1.1670. The next retracement objective is near $1.1930. We anticipated this euro bounce and suspected that late longs are vulnerable to tomorrow’s US CPI and retail sales report that will be impacted by the storm, and the tight inventory/sales balances for some household goods. Again, we point out that while the September jobs report was skewed by the storm, the upward revision to August average hourly earnings was not.