TD Securities: Give An Inch, Take A Mile

TD Securities note that “the Fed took what the market gave it and delivered a 25bp hike. That said, a cautious tone over an expected tightening in lending standards allowed the market to price in more easing further out the curve. It will take some time to realize the knock-on effects of lending standards in the hard data. That means that the market has the luxury of time to hold a receiver bias.”

• “An asymmetry should now form in fed funds/terminal pricing and around the data. Terminal pricing is likely to be capped especially after the Fed acknowledged less need to push it higher given recent banking events. Given the lags to show in the data, the market is likely to be more inclined to look through upside but react to the downside as confirmation bias.”
• “Note that the USD has seen a sharp flip in its sensitivity to both Fed Funds pricing and data surprises. Indeed, the USD is now trading with an eye to the easing cycle, not terminal. Should data soften in the near-term, the market may price in more cuts sooner. These are key reasons for our USD/JPY short. Meanwhile, the EUR is likely to remain firm as euribors - with support from ECB rhetoric to stay the course on tightening (and claim victory over market stresses) - exercise some monetary dominance against curves where CBs have committed to the sidelines.”