What To Expect From FOMC Minutes? - Views From 8 Major Banks

What To Expect From FOMC Minutes? - Views From 8 Major Banks

18 May 2016, 18:14
Roberto Jacobs

What To Expect From FOMC Minutes? - Views From 8 Major Banks

Morgan Stanley: At this stage Fed communication will be important for the further evolution of the USD. Yesterday it was non-voting Lockhart and the previously dovish Williams warning that markets underestimated the probability of the Fed hiking rates as early as June or July. July is a non-press conference meeting, but Fed Chair Yellen will provide her testimony between the June and the July meeting allowing her to prepare markets for a rate hike if needed.

Today, the release of Fed minutes will be important. Here then Fed could work further to correct rate expectations pushing the USD up further from here.

Barclays: As expected, the FOMC took a cautious stance at its April meeting. We viewed the statement as leaving the door open for June but by no means promising a rate hike.

Although we believe that data since the April meeting have likely shifted the timing of the next hike from June to September, we believe that much of the caution of FOMC members apparent in the March meeting owed to early-year financial market volatility, and we look to the April minutes to judge the extent to which these concerns have waned.

In addition, we see the committee as a whole looking through the Q1 weakness; however, we look to the minutes for any split in views among committee members and the number of participants who are concerned that the slowdown reflects the new trend.

SEB: With respect to the minutes, any indication of what officials would like to see before hiking rates again would of course be interesting to see.

It will also be interesting to see any reasoning around the decision to recover the risk assessment in the April statement - what was the Fed trying to signal exactly. The wording around inflaton was dovish in the April statement and going forward a change here would be a notable that the next hike is coming closer. Our forecast still is for a September hike.

Goldman: Ahead of the release of today’s FOMC Minutes, we review by how much US interest rates and the Dollar have moved on the day FOMC Minutes have been released since the beginning of 2015 (the year in which the Fed signaled that the policy rate could potentially be raised). We compare this evidence with that around the 2004-2006 Fed tightening cycle.

We find that, on average, FOMC Minutes have not been a significant market mover over the past year and a half and that US rates and the Dollar have not changed as much as they did during the previous hiking cycle on the day the Minutes were released. In our view, this can just reflect a more open and regular communication between the Fed and the market (via the media, for example) and the larger weight that the market places on the Summary of Economic Projections including the “dot plot” and press conferences.

That said, in line with the evidence around the release of the last two sets of Minutes and considering that the market prices a cumulative probability of a federal funds rate hike in June and July of around 20%, today we might see higher US rates and a slightly stronger USD even on the back of almost neutral Minutes.

SocGen: Bloomberg now puts the chance of a June hike at 12%, up from 4% a week ago, so higher rather than high. The chance of a hike by December has increased to 67% from 51% a week ago. After a marginal upside surprise in the CPI data yesterday, will we read anything less dovish in tonight’s FOMC Minutes than we heard after the meeting?

What is significant isn’t so much the increased talk of Fed hiking, as the wider market reaction. 10year Treasury yields have edged up to just 1.77%, with TIIPS steady at 14bp, but one chart-fanatic assures me that outside the US, major equity indices are pretty much all in a bear market now. If a 68% chance of a single Fed rate hike in 2016 is enough to damage sentiment that much, then we really are in a fragile state.

I’m not seeing much in yield differentials, real or nominal, to drive EUR/USD outside its range, but all point downwards. If we do get any further pick-up in Fed hiking talk, we’ll have a look at life below EUR/USD 1.10 again.

BNPP: Recent comments from regional Fed presidents (Williams, Lockhart and Kaplan) have forced rate markets to begin pricing more chance of Fed tightening in the coming months.US 2y yields have continued to rise in response, reaching new highs for May at 84bp and providing support to the USD. We see scope for this move to extend a bit further but do not anticipate a sustained revival of USD momentum.

We expect data in the weeks ahead to be too mixed to support expectations for hike in mid-2016. Perhaps more importantly, key members of the FOMC, including Chair Yellen herself, have been quiet lately but are believed to be much more cautious on policy.

The minutes to the April FOMC meeting to be released today will likely highlight the concerns of these members about slowing activity as was reflected in the statement at that meeting. Lastly, it remains far from clear that the risk environment can sustain a significant increase in Fed pricing. Indeed, the S&P 500 has fallen nearly one percent, presumably reacting in part to the adjustment in yields.

BofA Merrill: The April FOMC statement kept the Fed's options open, largely looking past the weak 1Q GDP data and slightly downplaying global and financial risks, but gave no clear signal on future policy. Since the meeting, a number of Fed officials have suggested that the Fed could still hike (at least) twice this year, whereas many Fed Watchers – including us – have recently revised expectations for rate hikes this year to just one. In this sense, the minutes are likely to be relatively stale. Market attention should focus on what conditions Fed officials indicate would be needed to hike, rather than any discussion of explicit timing that may appear in the minutes. An indication at the April meeting that the Fed remained quite far away from its next hike would likely be dovish for the markets.

In the March Summary of Economic Projections (SEP), more Fed officials saw downside growth risks versus December. However, the April statement highlighted "additional strengthening of the labor market" as well as strength in household real income, consumer sentiment and housing. How the Committee assesses the risks around growth and what growth pace would be sufficient to support additional hikes would notable. So to would be the debate around how much slack remains.

On inflation, the April statement remained cautious and changed little. An assessment that inflation or inflation expectations have started to improve would also be notable, and mildly hawkish. The minutes may also discuss how the Fed intends to interact with and guide the markets through communication. Examples might include re-introduction of a balance of risks, changes to the “monitoring” language, and explicit signals in the statement. We expect some debate over the timing and implementation of any changes to Fed communications.

Additional discussion topics that should get attention may include: the recent decline in the trade-weighted US dollar and the impact of exchange rate movements on Fed policy, the outlook for global growth (particularly China) and the corresponding risks (such as Brexit), and the growth rate of productivity.

Forward-looking discussions around the number and pace of hikes might also garner some attention, but as suggested above the market should generally fade these as old news. We expect the broad tone to be consistent with additional rate hikes later this year.

Citi: Recent Fed comments and improved data are beginning to breathe some life back into the June FOMC. The addition of Yellen and Fischer appearances, and relatively hawkish comments by Lockhart. Williams and Kaplan have created a market buzz. June odds have moved up by 10% since yesterday, but are still maybe around 15%. It has helped that perceptions of European political risk have eased somewhat.

My bottom line is that I expect the Minutes to open the door to a hike before the end of the summer, but not point to June as explicitly as the October 2015 Minutes pointed to December. This would still pressure asset markets off somewhat fatter June tail risk, but I do not expect June risk to get bloated.


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