US: Market simply over-reacted to Fischer’s comments on Friday - BNZ

Jason Wong, Currency Strategist at BNZ, suggests that yesterday the only data releases of note were US personal income and spending data, along with the PCE deflators.

Key Quotes

“They were in line with expectations, consistent with the view that consumer spending remains solid and Q3 GDP is set to rebound, after sluggish readings over the past few quarters. While annual core PCE inflation was a touch higher than expected, the monthly figure was in line and the data show a stabilisation of inflation pressures over the past few months.

While that data likely had little impact on the market, the more likely explanation for the rates move is that the market simply over-reacted to Fischer’s comments on Friday. While he was obviously keeping alive the possibility of a September rate hike and two possible hikes this year, ultimately it comes down to the data over coming weeks and months. However, this isn’t an entirely satisfactory explanation, as the USD has managed to hold its ground, following the surge after Fischer’s comments.

The San Francisco Fed released a research paper which was consistent with the St Louis Fed’s Bullard view that the neutral policy rate had fallen. The implication is that the process of normalising the Fed Funds rate may end up being more gradual. It’s certainly consistent with the view that the low interest rate environment could be the new norm.”