Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 22 May 2016 at 23:27 GMT

The Macro Take: Week 21 and Fed rate hikes are back in focus

Global Macro Strategist / Saxo Bank Group - Singapore Hub
  • The next most important thing probably not Brexit but next few Fed hikes 
  • June is live, but July or September are more likely, with the second hike in December
  • Fed-implied probability of two hikes by year end should be closer to 50%
  • The street is behind the curve on this and/or does not believe it
  • Where does DXY go, given we got to 100.17 going into just one rate hike last Dec
  • Where do US 10-yrs go, given we are at 1.83% and we were about 2.30% last Dec? 
  • Flash PMI week ahead, UK to get second GDP reading with market expecting +2.1%


Good morning to everyone and welcome to week 21. It is Monday May 23. I was going to combine my thoughts on the Fed plus the Brexit, but it was turning into a bit of a beast. So the Brexit peace will formally be out in a separate piece later this week. Note we also have a dedicated Brexit site. 

 The Fed-implied probability for two rate hikes by year end is about 25%, but that feels too low. Photo: iStock


1. Week 21
2. Fed Hikes Back In Focus 
3. Reflections of a Global Macro Neophyte

Week 21


Usual troop of Federal Reserve speakers, most importantly we have Janet Yellen speaking at Harvard – more honouring her on Radcliffe day, looks like helicopter Ben will be there as well. 
Outside the US, we should also hear from Glenn Stevens (RBA) and Mark Carney (BoE) on Tuesday.

Central-bank wise

On the emerging markets front we’ll hear from the likes of Turkey, Nigeria and Ukraine. Bank of Canada will most  likely steal the spotlight, given the crazy run we’ve had in oil, core CPI coming in better than expected last week (+2.2% actual vs. +2.0% estimate) and still hot housing market. For now economists are not expecting any change in the policy rate. 

It's also worth noting that the G7 meetings are on in Japan later this week, on May 26 to 27 – get the feeling the  market is expecting some kind of fiscal stimulus or something from Japan post this meeting. 

Economic data-wise

Getting towards the end of the month means its going to be a flash PMI week ahead. Most important here will  be the US's (today), with the market expecting 50.8 e vs. 50.8 previously. Europe will have a lot of GDP data due, including a second reading out of the UK: +2.1%e YoY, +0.4%e MoM. 

For more details check out the Trading Floor calendar

What KVP is watching this week:

Central banks:
Speakers/Other: Monday May 23 – Sunday May 29
Fed Speakers: James Bullard & John Williams (23), Patrick Harker (24 & 25), Neel Kashkari (25), Rob Kaplan (25), Jerome Powell (26), Janet Yellen (27)
Other Speakers: Glenn Stevens (24), Mark Carney (24)

Meetings/minutes this week: Monday May 23 – Sunday May 29
Turkey +7.25%p (24), Nigeria 13.00%e 12.00%e (24), BoC +0.50%e +0.50%p (25), Ukraine +19.00%e  +19.0%p (26) 
Meetings/minutes next week: Monday May 30 – Sun Jun 
BoK Minutes (31), Fed Beige Book (1), ECB -0.40%p

Fed hikes back in focus
Fed noise – not all voices are equal. Pay attention between voters and non-voters. The voters have been generally less hawkish in their commentary than the non-voters:

2016 FOMC committee members

  • Janet L. Yellen, Board of Governors, Chair
  • William C. Dudley, New York, Vice Chairman
  • Lael Brainard, Board of Governors
  • James Bullard, St. Louis
  • Stanley Fischer, Board of Governors
  • Esther L. George, Kansas City
  • Loretta J. Mester, Cleveland
  • Jerome H. Powell, Board of Governors
  • Eric Rosengren, Boston
  • Daniel K. Tarullo, Board of Governors
Alternate members
  • Charles L. Evans, Chicago
  • Patrick Harker, Philadelphia
  • Robert S. Kaplan, Dallas
  • Neel Kashkari, Minneapolis
  • Michael Strine, First Vice President, New York

Source: US Federal Reserve

This is also why in reading the April FOMC minutes from last week, a lot more weight and attention should be placed on the section headed by Committee Policy Action than, say, Participants' Views on Current Conditions and the Economic Outlook. Either way, I think the delta in hawkishness is more about speed than magnitude of rate hikes. 

As alluded to post the minutes last week (in emails and conversations to clients) I was very surprised at how  June 15 was brought back into the light, despite the Brexit vote landing the following week on Jun 23. 

Even if it ends up being relatively clear that the UK will stay, I would have expected the Fed to be more  prudent – after all, if there is anything that we should have learnt over the last few years, anything is possible!

So what’s my current thinking on rate hikes and Fed-implied probabilities?
  • Assuming US data just holds (does not have to get better) and market volatility stays grounded (i.e. no UK exit), then I’d expect a Fed hike over the next three meetings.
  • My money is on July or September, I still think June is too punchy for this Fed – not to mention potential  political pressure that will be coming into play globally as we get to that June 23 date .
  • I further believe they will move for a second time, possibly November, but most likely December.
  • Turning to the Asia Pacific on the Thursday post-Fed meetings, so the following grind up in the probability of one Fed hike in Jun and Jul from Monday-Tuesdat-Thurday -- June: 4%-12%- 28%; July: 19%-28%- 47%.
  • As of the weekend, you can see from the table below that the Fed-implied probability for two hikes by year end is about 25% .
  • That just feels too low in my mind, even the 75% for one hike by year end does not seem high enough to me .
  • I think there should be more like a 50% chance of two hikes by year end, and expect that probability to rise.
  • It assumes a lot (US economy holds, USD strength does not send EM and CMDs into a tailspin, China does not devalue/have a hard landing, markets don’t sell off).
  • I also have a very strong view that US inflation is real and will surprise in the 2H (low base on commodities from last year plus tighter job market, expect more non-farm payrolls prints sub-200,000 as we get further into full employment).

25% chance of two Fed hikes by year end is too low – obviously US economy has to hold
So if we made 100.17 on DXY going into one Fed hike, where does it go after one or two more?

Thoughts on the market and Fed hikes

Here are some quick trading thoughts on capitalising on this thesis of the market being behind Fed hikes this year:
  • US financials to outperform relative to the market, they are also one of the few sectors around – IYF is the US financials ETF, but a basket of Citi, JPM, Wells, etc … vs SPX should still give you the thematic exposure 
  • US financials to outperform vs. their EZ counterparts 
  • US bonds to be caught between a rock and a hard place – interesting to note yields are still much tighter than where we were going into the Fed’s first rate hike – Obviously a bigger percentage of the world is sitting in negative rates than was previously the case 
  • I’d expect a reversal in the yield/defensive plays in the US that have done so well, vs. interest sensitive sectors that benefit from rising rates 
  • Stronger dollar implications for EM and Commodities 
  • US equities could tank again, similarly to what we saw after the Dec hike last year – so tail risk and long vol trades could also complement portfolios 
  • Net-net we may have the next leg of a sustainable move in US rates and the US dollar

Long-term weekly chart of inverted DXY vs MSCI emerging market index – clearly EM is asleep.

And if you think US equities are any different, nope! Fast asleep at the wheel…
Key franchise pieces

KVP’s 2016 Global Macro View: Is this the year of the bear?
Gold/Silver: Probably the most important call that KVP has ever made and worth reviewing, given the  pullback in some of the miners last week: Mon, Jan 25. The Macro Take: Get the picks out for gold and silver miners

Also, I keep getting questions on how to play gold in this timezone if you don’t want to do spot
(XAUUSD) or futures (GCA). Then you can pick up the following on bloomie: GOLD AU, QAU AU, GLD SP, 2840 HK – obviously different levels of liquidity. 

And tickers on the Saxo platform: gold:xasx, qau:xasx, o87:xses and 02840:xhkg

Open trade views

Live tactical trading views (Think near-term, noise, technical-momentum type trades)
No current tactical trading views

Live strategic trading views (Think medium-long term, old school macro, more fundamentals type of trades)

Monday, January 25: High conviction multi-year call on being long gold and especially the gold and silver miners: GDX, GDXJ, SLV, Gold futures, Gold spot
Thursady, February 25: +100% price target to $40 on GDX (gold miners etf) entry $19.11, Stop $12.30, Target $40
Monday, March 21: Long vol strategies, with a Saxostrats on long OTM 20 strike September expiry VIX calls

Reflections of a global macro neophyte 

Stumbled across an amazing brunch joint in Singapore recently, right down from the JW Marriott on Scotts Road. Try out Wild Honey – make sure you book. I tried dropping the KVP name, Global Macro etc… but I just got puzzled expressions … Hmm…. Clearly more work to be done. Great food, great deco and great service – rarely do all three line up. 

Saw the new X-men Apocalypse over the weekend. Cool popcorn flick. I have to admit special effects are  just getting astonishing nowadays. Remember that Wag The Dog movie a while back? – they “create a fictitious war” to get the American attention away from a Presidential crisis – that is pretty much going to be a serious risk going forward. 

That’s how good the special effects and graphics are getting, it's going to be impossible to tell reality from, say,  a fictitious terrorist attack or war scene or crop crisis in West Africa, etc. Snap, for all we know, its already taking place. 

Have an excellent week everyone – I’ll be travelling for most of the week, so may be touching base a lot less  than is usually the case, but as always I am on my cell / bloomie chat if needed. 

Lastly, life is very similar to investing/trading. You end up with what you put up with – so set your standards high, focus on the process and profitable trading/investing to you all – be successful and don’t forget to enjoy the journey. 

The effective use of our time is the most valuable commodity we have.


– Edited by Susan McDonald

Kay Van-Petersen (KVP) is Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to, please follow him on twitter @KVP_Macro.
Market Predator Market Predator
MP likes KVP's term helicopter Ben :-)
johnnyw johnnyw
wag the dog - good movie, I enjoyed it. I wonder what Ludwig Von Mises would have to say about all of this :p


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail