Trader Talk

Commodities and commodity stocks drop on confusing Fed message

The Federal Reserve Bank building in Washington, D.C.
Kevin Lamarque | Reuters

Is the Fed confusing the market? The dollar index has now risen four days in a row, and commodities and commodity stocks are now coming under pressure as certain Fed speakers try to keep rate hikes on the table.

It was a beautiful narrative: the FOMC last week clearly reflected a dovish tone, implying two rate hikes in 2016, while modestly upgrading the state of the economy. Only Esther George of Kansas City, a hawk, dissented.

But that narrative is starting to change, for reasons that are confusing the market. This morning James Bullard, head of the St. Louis Fed and an FOMC voter, implied in an interview that an April rate hike was possible. He joins Patrick Harker from Philadelphia Fed, a hawk and nonvoter, who also said April was on the table. Charles Evans and Dennis Lockhart, while both nonvoters, also made hawkish comments recently.

My colleague Steve Liesman wrote about this last night, noting that Fed Chair Janet Yellen may have a "mini-revolt" on her hands.

This has only become more relevant now that Bullard, who is a voting member and perceived to be a centrist, has come out and implied the Fed may be getting behind the curve.

Bullard appeared to have an immediate effect on currency and commodity markets this morning: the dollar strengthened, and commodities dropped, with copper down 1.8 percent, gold down 2.5 percent, oil down 3 percent.

Predictably, materials, energy and industrials, all sensitive to price moves in the dollar, are downside leaders today. This is a change from the trend, since these three sectors have been the market leaders this month and since the Feb. 11 bottom.

Perhaps more importantly, the dollar index has been up four days in a row. It has now retraced 60 percent of the loss it saw in the days immediately following the FOMC meeting, when the dollar index dropped a stunning 2.3 percent in two days.

What happened? It's possible the Fed has seen the market reaction and become alarmed by the complacency. It's true, the probabilities for even a June rate hike—let alone April--declined dramatically in the face of the Fed meeting.

That may have alarmed the Fed, and so some members may feel the need to keep the markets more alert.