“To understand the market’s expectations, we must look at the path that the Federal Funds Futures are currently implying for the policy rate. The market is trading at a level consistent with an average rate in December of 0.32%,” said Deutsche Asset & Wealth Management head of ETF Strategy Dodd Kittsley in a recent note. “If we assume a current rate of 0.13% (borne out by the July futures, and, as one would expect, the midpoint of our current range), that implies a predicted move of 0.19% between now and year-end– hardly overwhelming evidence that the market and the Fed are completely in agreement over expectations for the coming months.”
Currency hedged ETFs might not be, at least not, a bellwether in terms of gauging Fed action, but worth are recent inflows to the products. Since the start of the current quarter, DBEF has added $372.5 million in new assets while investors have poured nearly $233 million into the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU).
Those inflows could be signaling professional investors’ belief that Fed liftoff is a done deal and is coming soon. Or perhaps that isn’t the case and easy money policies in the ex-U.S. developed world are driving the dollar higher and dollars into currency hedged ETFs.
Despite all the effort that the Fed has made over recent years to transparently communicate its thinking to the public, a divergence of opinion seems to be brewing. Yellen and other Fed officials have given reasonably strong suggestions that liftoff will occur this year, and indeed that investors may even need to brace for two rises. The markets beg to differ, and are pricing in a more dovish path,” adds Kittsley.
Chart Courtesy: Deutsche Asset & Wealth Management