US rate expectations have further to rise

The adverse market reaction to the slightly more hawkish tone of comments from the Fed yesterday looks justified to us. Indeed, market expectations for US interest rates are likely to rise further, putting additional upward pressure on Treasury yields and undermining equities, while supporting the dollar. Nonetheless, the Fed is still likely to move only gradually, so we are not anticipating major falls in the prices of riskier assets, including emerging markets and commodities.