Markets have almost fully priced in a third hike for 2017 in December

"Firmer US data and official comments have led markets to recalibrate their Fed tightening expectations," BBH economists noted in a recent report.

Key quotes:

"The US 2-year yield of 1.56% today is the high for this cycle and the highest since October 2008. The US 10-year yield moved close to 2.0% last month but has since turned higher and moved close to the May/June high near 2.40% and stand at 2.34% today."

"Markets have almost fully priced in a third hike for 2017 in December. Yet, only one hike is currently priced in by the markets for 2018 followed by less than one more in all of 2019 and 2020 combined. The latest Fed Dot Plot sees one more hike in 2017, three in 2018, two in 2019, and one in 2020. The Fed Funds futures strip shows that the market still does not fully believe the Fed. EM FX is likely to come under pressure if market expectations move closer to the Fed’s outlook."

"We are seeing greater divergence between EM equities and EM FX. While MSCI EM is making new cycle highs and currently up 31% YTD, the corresponding MSCI EM FX index has been lagging this month. The correlation between the two is currently around 0.54, down from the high near .85 back in May and a high above 0.90 back in July 2016. "

"As the global backdrop hopefully clears up in the coming months, we still believe it is very important for investors to continue focusing on country fundamentals and on hedging out currency risk whenever feasible."

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