The dollar is advancing, yields are higher, and equity futures are in retreat as more overt hawkishness from a Fed official weighs on global risk sentiment.

Markets tumbled yesterday morning when Minneapolis Fed President Neel Kashkari – doing his best to become the new Jim Bullard – suggested that further rate hikes remained a possibility. Speaking at a monetary policy forum in London, Kashkari said “the odds of us raising rates are quite low,” but “we could stay on hold for an indefinite period of time, and “I don’t think anyone has totally taken rate increases off the table”.

Kashkari’s influence could be overstated. Neel is not currently a voting member of the Federal Open Market Committee, and has proven far more responsive to changes in economic data than many of his more centrist counterparts over the years. But we think the “dot plot” summary of economic projections presented at the central bank’s June policy meeting will see the median expectation for end-2024 policy rates move higher, with two, or perhaps only one rate cut implied by year end, down from the three previously projected.

There were no material currency market disruptions associated with last night’s transition to T+1 equity settlement in the US. The hours between the North American close and the Asia open saw liquidity levels remaining sufficient, and currencies traded smoothly, with nothing resembling a “flash crash” in any of the pairs we track. An upset in the coming days is still possible, but it looks as if the financial system was well-prepared for the shift.

The euro slipped against the pound this morning after reports from a number of German states showed inflation cooling by more than expected, setting the stage for a softer set of bloc-wide prints on Friday. North Rhine Westphalia said its consumer price index was unchanged in May, Bavarian inflation fell to 0.1 percent from 0.6 percent in the prior month, and Saxony reported a small rise. Consensus forecasts suggest that year-over-year euro area inflation will climb incrementally to 2.5 percent in May from 2.4 percent in the prior month, putting the conditions in place for a rate cut from the European Central Bank in June, followed by another before year end. In contrast, a full move isn’t priced in for the Bank of England before November, with the second seen hitting in May next year.

You have to squint to see it, but expected growth differentials are narrowing. The gap between projections for this year’s growth in US gross domestic product and forecasts for other advanced economies reached a peak in early May, but has declined in the intervening weeks as American data has softened and sentiment has turned positive elsewhere.

Trading in Wall Street’s “fear index” – the VIX volatility measure – remains remarkably placid. Using z-scores, which measure statistical dispersion around the mean, it is clear that implied volatility in equity markets is running well below historical norms, and has yet to hit the turbulence that typically ensues during the latter half of a US election year. This has important implications for foreign exchange markets: we suspect buy-side participants are generally under-hedged against currency risk after a long period of below-average volatility, and if this election plays out as others have, risk-sensitive currencies such as the Australian and Canadian dollars, Mexican peso, and Norwegian krone could be vulnerable to sell-offs in the early autumn – while the yen and Swiss franc might find themselves coming under renewed upward pressure.