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Beware The “Faux Hawks,” Says David Rosenberg

Last week’s and this week’s hawkish Fed comments are sending ripples throughout the markets as officials seem to be implying that a rate hike is on tap in June. U.S. Treasuries are essentially flat, the U.S. dollar is up, and gold has tumbled to a more than three-week low as investors continue to chew on what policymakers said. However, Gluskin Sheff Chief Economist David Rosenberg says we shouldn’t read too much into the Fed’s hawkishness. He explained last week that history shows the Fed sometimes reverses its stance very quickly after leading investors to believe that an interest rate hike was imminent.

Beware The "Faux Hawks," Says David Rosenberg

Hawkish Fed comments impacting Treasuries, gold, USD

More than more members of the U.S. Federal Reserve are sounding hawkish, with Boston Fed President Eric Rosengren telling the Financial Times over the weekend that the conditions needed for a rate hike are “on the verge of being broadly met.” Today, St. Louis Fed President James Bullard told attendees at a financial institution forum in Beijing that the labor markets are “relatively tight,” which could “put upward pressure on inflation.” Also this week, San Francisco Fed President John Williams made comments that were even cut and dry, saying that two or three hikes appear likely this year, reports CNBC.

Following these comments from hawkish Fed members, today U.S. sovereign bond prices were roughly flat, with the 10-year Treasury’s yield edging higher to 1.851% and the 30-year Treasury remaining flat at 2.637%. CNBC reports that tomorrow the U.S. Treasury plans to sell $26 billion worth of two-year notes in what will be only the first of three auctions this week.

Also today, the U.S. dollar edged higher today, with the WSJ Dollar Index rising by about 0.05%, the euro against the dollar falling 0.3% to $1.1193, and the pound declining by almost 0.2% to $1.4475, reports The Wall Street Journal. An interest rate hike is seen as a positive for the dollar because yield-seeking investors become more attracted to it.

Reuters also reports that gold fell to its lowest level in three and a half weeks. Bullion has been pressured since the Fed’s April meeting minutes were released as they signaled that a rate hike could come in June. Spot gold hit its lowest level since April 28 at $1,242.63 per ounce, while U.S. gold futures declined 0.5% to $1,246.80.

David Rosenberg – Will the Fed really raise rates in June?

David Rosenberg said last week that investors should avoid overreacting to the hawkish Fed commentary and suggested that we could see a repeat of last summer. Many members of the U.S. central bank seemed to indicate that a September rate hike was all but a done deal, but then “global economic and financial developments” caused them to change their mind.

Before the rate hike last year, Rosenberg said the last time the Fed suggests it might tighten its policies was about two years ago when then-Chairman Ben Bernanke’s testimony to Congress lit a huge selloff in Treasuries, now sometimes referred to as the “Taper Tantrum.” When he said that “in the next few meetings,” they might “take a step down in our pace of [asset] purchases” known as quantitative easing, it ended up being five meetings and seven months before action was taken. Around that time, hawkish Fed comments came from other members as well, including Williams and Rosengren, who also made hawkish comments within the last week, Chicago Fed President Charles Evans, Dallas Fed President Richard Fisher, and Philadelphia Fed President Charles Plosser.

David Rosenberg terms the Fed members that made prematurely hawkish comments “faux hawks.”

“This is not the first time (and it won’t be the last time) they overreact to what I can only describe as an economy that is muddling along,” said Rosenberg in his May 20 “Breakfast with Dave” note. “And let’s face it, the Fed has been, this entire cycle, perpetually optimistic.”

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