The minutes from the Federal Reserve’s April meet put the chances of a June interest rate increase from the Fed in play and markets were all over the place after the big reveal this afternoon.

First, the scoreboard:

  • Dow: 17,519, -11, (-0.06%)
  • S&P 500: 2,046, -1, (-0.04%)
  • Nasdaq: 4,736, +20, (+0.4%)
  • WTI crude oil: $47.90, -0.9%
  • 10-year Treasury yield: 1.87%


June is in play.

On Wednesday, the minutes from the Federal Reserve’s April meeting put a rate hike in just four weeks’ time squarely in view for the markets.

Wednesday’s minutes — a summary of the Fed’s discussions at its latest monetary policy meeting, which saw the Fed keep interest rates pegged at 0.25%-0.50% — revealed that June is very much in play for another benchmark rate hike from the US central bank.

Here’s the key passage from the minutes:

Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 per cent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.

So while April’s decision to keep rates unchanged met only one dissenter — Esther George, president of the Kansas City Fed voted for increasing interest rates at that meeting — the minutes reveal a more split Fed that sees another move likely if the economy continues to improve.

Now, it’s worth noting that the disappointing April jobs report came out after the Fed’s decision, and while on balance most economic data has continued to suggest an improving economy, this report may have already pushed June off the table. We’ll have to wait a few weeks to find out.

But in conjunction with commentary out Tuesday from San Francisco Fed president John Williams and Atlanta Fed chief Dennis Lockhart that June was a “live” meeting, another passage from Wednesday’s really stands out:

Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasised the importance of communicating clearly over the inter-meeting period how the Committee intends to respond to economic and financial developments.

For most of the last few weeks, market-implied chances of a rate hike in June as calculated by Bloomberg showed about 5% chance of a move in June.

As of Wednesday afternoon that was up to 32%; market participants have pointed to 70% on this calculation as a “magic number” of sorts for the Fed to feel comfortable raising rates. By this logic, only the December 14, 2016 meeting is fully priced-in for a policy change.


The bond market bore the brunt of the market reaction to the Fed minutes, with the US 2-year Treasury yield rising more than 7 basis points, the 5-year yield rising 11 basis points, and the 10-year yield rising by 10 basis points on Wednesday.

With the recent move higher in Treasury yields — which rise when bond prices fall — markets are clearly prepping for a higher-rate environment after commentary from market participants in recent weeks had suggested a re-test of record-low yields seen back in 2012 was more likely than the long-called-for reversal higher.

All this to say: markets got caught flat-footed.

The US dollar also spiked higher after the minutes, rising by 0.6% to as high as 95.11. The Aussie dollar was down about 1.3% on Wednesday while the Japanese yen was off about 0.7% as was the euro.

Stocks, meanwhile, finished the day mixed after rallying early in the morning and selling off hard following the Fed minutes. The Dow was up as much 100 points earlier in the day and fell as many as 105 points following the minutes’ release.

Sovereign Debt

Analysts at Macquarie think a “wave” of sovereign defaults could be coming in the wake of the commodity price collapse.

Writing in a note to clients, Macquarie said that, “The last great collapse in oil and commodity prices from the end of the 1970s led to a decade-long wave of sovereign defaults. We believe another wave is coming, involving multiple debt restructurings over many years.”

For some time now folks in markets have been bracing for the “real” fallout of the collapse in oil prices to begin as the headline collapse in prices is now going on two years. The “real” fallout would include things like massive corporate or sovereign defaults.

The basic outline here is that petro-states like Saudi Arabia and Nigeria, which are majorly dependent on revenues received from oil, will see current account deficits increase which, given that their currencies are pegged to a seemingly ever-strengthening dollar, could lead to currency devaluations.

This of course makes any dollar-denominated debts more expensive, dents the purchasing power of residents, though could help export competitiveness.

In related news, a Bloomberg report out Wednesday said Saudi Arabia could begin paying some government contractors with IOUs instead of cash.


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