Richard Franulovich, head of FX strategy at Westpac, suggests that the pulse of the US economy appears to be firming as the latest Atlanta Fed Q1 GDP nowcast for example is at 2.3% annualised, a notable recovery from 1% three weeks ago.
“The Atlanta Fed’s nowcast tends to evolve in line with trends in our US data surprise index; as it should tautologically; they both capture evolving data trends. Our data surprise index has strong mean reverting properties and after hitting three year lows in late March the near term risks appear risks toward a stronger complexion to the US data going forward.”
“That would tend to imply further US growth upgrades in coming weeks.”
“A run of potentially stronger US data would ordinarily prompt a lift in US yields. However, the Fed’s “patient” reaction function might stymie that; history shows that short term interest rates tend to gravitate toward the Fed Funds rate in the weeks after the last hike regardless of the data flow.”
“Six month forward Fed Fund yields were 20bp to 40bp above the Fed Feds target as of the last hike in the two prior tightening cycles (May 2000 and June 2007). But, 12-16 weeks later Fed Fund futures yields were trading through the Fed’s target in both of these cycles.”
“In subsequent weeks Fed Fund futures yields traded even further below Fed Funds. On that metric current short term interest rate pricing is about right in line with historical trends and may well anchor yields regardless of any potentially stronger data.”