He said the bank has raised its forecast for US Treasury yields after the latest US Federal Reserve meeting and believes the outlook reflects economic strength rather than financial stress. He also expects the dollar to extend its gains, with implications for global capital flows and currencies over the next few years.
Following the Federal Reserve’s latest policy decision, Englander said the central bank’s move has reduced concerns around fiscal dominance and strengthened the case for a firmer dollar.
“We’ve just published a piece that argues that this may be the beginning of an extended dollar rally,” he said, adding that some of the concerns that had weighed on the US currency over the past year have now eased.
On the Bank of Japan (BoJ), Englander said markets are largely expecting a 25-basis-point rate hike, but the policy guidance will be more important than the move itself.
“We think 25, but they have another 65 or so by the middle of next year. The focus is going to be on how hawkish he sounds,” he said.
This is an edited transcript of the interview.
Q: It’s been a central bank-heavy week in terms of news flow. First, the Fed, and today, all eyes are on the BOJ. Take us through what you made of the Fed decision. Did you think Kevin Walsh sounded hawkish? What does it mean for yields? Yields have retreated after spiking in the prior session, so they’re now back below the 5% mark. And what is expected from the BOJ, and how much of it is priced in?
A: I think of the Fed we hadn’t expected them to hike, but they did. The market’s been debating whether the hike represents – the first one of a couple that aren’t going to do too much damage, or a signal that there’s a lot of hawkishness coming.
The initial reaction during the press conference, when everything was selling off and yields were going up, suggested that the market was taking a pessimistic view that he was just going to hammer rates higher in order to get inflation down. Today they’re taking a more benign look, in part because the growth outlook in the US is better.
So, we’ve added one more hike. We don’t think he’s going to have to hike as much because we already thought that disinflation is on track. But what I do think is that the hike took away some of the – let’s call it fiscal dominance concerns that had been weighing on the dollar, and we’ve seen the dollar rally.
So, we’ve just published a piece that argues that this may be the beginning of an extended dollar rally because, throughout the last year, there have been short-term concerns, and those have now been swept aside.
As for the BOJ, we think it will hike by 25 basis points. Everyone thinks 25, but we think they have another 65 basis points or so by the middle of next year. The focus is going to be on how hawkish he sounds.
The issue is that he wasn’t sounding hawkish at all a few months ago, and it’s the pressure on the yen that’s leading to this. It’s not clear how strong the Japanese economy is and whether these hikes will do it any good.
Q: In one of our conversations a few months ago, you had called for the 10-year yield actually to move to around the 5% mark. We’re there now. Equity markets have been fairly resilient as well. How do they fix this rising yield problem? Point number one. And since you’re calling for a stronger dollar, where is the dollar headed? Because both of those are key variables from an Indian market perspective as well.
A: You’re asking a very timely question because we’ve not only emphasized the dollar upside in the aftermath of the FOMC meeting, we’ve also raised our 10-year forecast to 5.5%, getting there by the middle of 2027.
And the question for the US is whether or not that’s going to slow the economy, or whether that’s just consistent with the strong activity indications that we’re seeing. It’s true that activity indicators have picked up. For the US, it’s fine for growth. The US will be able to deal with it. Some sectors like housing will be under pressure, but the investment side is strong. Consumption seems to be relatively resilient as well. It is a problem for the rest of the world if you don’t have the benefit of being an oil exporter like the US, and having technology and investment with all systems go. The knock-on effects from the US interest rate hike could be quite painful.
You have to hope that there’s some growth that gets shared among everyone, but it’s not obvious that – it may be good for the US but what is good for the US that pushes interest rates up may not be good for everyone else.
Q: What’s the dollar index level? You said on the US 10-year, you see it going up to 5.5%. What about the dollar index?
A: I’d say about another 3% higher from current levels.
Q: At 5.5% in terms of the bond yield, if you do get there, you don’t see it breaking the US equity markets. The economy is strong enough to absorb that, but it’s going to hurt the rest of the markets. Which ones are likely to be more susceptible? Are you bringing down your equity market forecast because of that, or on account of that? And do you think next year as well is going to be a year in which the US outperforms the rest of the markets? What’s the forecast?
A: The indications of strength, just as an example, the Philadelphia Fed confidence index has been around for a long time. It’s close to record highs, and especially this late in the business cycle, it’s super rare that you ever see it nearly as high as this.
So, the growth picture is very good. It’s not that bond yields are going to be driving growth and earnings; it’s earnings and growth that are going to be driving bond yields.
So, in the US case, it’s a happy combination. As I said, there are some sectors. Housing remains vulnerable. It’s never really recovered in recent years, and that’s going to be a drag. Exports certainly will be a drag. For the rest of the world, I think if oil prices stay up and you’re an oil importer and you don’t get the knock-on effects from US growth, or the forces that are driving US growth aren’t reflected in your own economy, then it’s going to be a hard road.
You can look at India. We already expect the INR to depreciate over the course of the next couple of years, and it certainly adds some upside risk to dollar-INR.
Q: You’re expecting the rupee to weaken? You know, for the time being, at least, the response to the FCNR(B) deposits has been very, very strong, and it’s bought some kind of stability. But you believe that in the next couple of years, the rupee will move lower?
A: This is a medium- to long-term forecast. We do see pressure resuming. I think the measures look to be successful. Dollar-INR is actually back up to where it was earlier this year, so it wasn’t a knockout blow to INR weakness. And I think that unless we get oil prices down, if US rates go up and oil prices stay up, then it could be a tough picture.
Q: A quick word with regard to US President Donald Trump. How do you read what he’s been saying? One thing’s clear: in the recently concluded Fed meeting, its independence could not be questioned. They went ahead, they hiked, and sounded quite hawkish as well. But President Trump is faced with elevated crude oil prices, higher yields, a higher deficit, and midterm elections are coming up. What would you expect? It’s difficult to imagine, but do you think it’s come to that tipping point where he needs to pull back with regard to this Iran war? I don’t know how he’s going to end it, but does he need to end it in some way?
A: Politically, I think he has to win it. I don’t think pulling back would work for him in political terms. The midterms, the House is long gone. The Senate’s in question. I don’t think this rate move is going to make that much of a difference with respect to the political outlook. If mortgage rates were coming down, that might make a difference.
But I don’t think they would have come down had the Fed been more dovish. What you would have seen is more risk premium in the bond market. Now what you have is real yield. So, there’s too much emphasis being put on Trump aiming for six weeks from now and the midterms. There’s very little visible that’s likely to work in his favor, certainly in keeping both houses.
For the full interview, watch the accompanying video
Catch all the latest updates from the stock market here
