What To Expect From FOMC Minutes? Market predictions and reactions - page 7
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The Week Ahead: To Hike Or Not To Hike?
After many years of standing pat on interest rates, there is finally a genuine chance of a shift in Fed policy. The punditry will be asking:
To hike, or not to hike?
Prior Theme Recap
In my last WTWA I predicted that the end of summer and market declines would create buzz about the need to change year-end market targets. That was mostly wrong, lasting for about one day! Once again there was plenty of volatility to discuss. As he does each week, Doug Short’s recap explains what happened and his great weekly snapshot lets you see it at a glance. The full article always includes several other helpful charges. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).
The chart shows the S&P 500 gain for the week (over two percent), but you can readily see why it did not feel that good. Wednesday’s big gap opening turned into a 1.39% loss on the day. At least the week was good enough for the Texas boys to take over from “Markets in Turmoil” in CNBC prime time!
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.
This Week’s Theme
Whether or not the Fed decision this week actually matters is one of the questions, but it is still the story of the week. With an actual policy change in play, expect every pundit to explain what the Fed has done wrong and what it should do now. The question on the lips of all will be:
To hike, or not to hike?
There are secondary questions as to what the Fed will do, as opposed to the more popular discussion of what it should do. And finally, everyone wonders about the market reaction.
The Viewpoints
We have a three part question with multiple viewpoints on each. The story has enough complexity to satisfy interviewers, pundits, and even some actual experts.
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FOMC meeting this week - ' hugely contentious decision, clashing data, heavy lobbying
While we sit back and wait, examining chicken entrails & tea leaves, Janet Yellen faces "a leadership test as she presides over a hugely contentious decision on Thursday, amid clashing data and heavy lobbying from across the globe"That's the take in a front-page article from the Financial Times on Monday
It touches on what Bill Evans (chief economist at Westpac) said, that no hike in Septemeber could create a destabilising period of uncertainty. Evans also added that delaying the hike until December places "a major policy change into a time of limited market liquidity".
The FT also makes the points:
- Divisions still within the FOMC (and amongst traders & economists/analysts)
- The Fed has not clearly laid the groundwork for a move in September ... with the FT making the point that
The Financial Times (gated, but can be read with a free registration) article has more: Fed guidance splits markets over rate risesource
Finally someone said it "heavy lobbying"
FOMC decision will be political decision. God help us with the clever politicians we have
Trading FOMC: Not A Simple Binary Bet
Trading FOMC Is Not A Simple Binary Bet
While there’s a 28% chance of a Federal Reserve rate hike this week according to Fed fund futures, 50% of the 102 economists surveyed by Bloomberg are looking for liftoff to begin this month. For some, the disconnect makes for difficult positioning but we believe that the lack of agreement motivates investors to take profit and/or reduce positions ahead of the FOMC rate decision. We have already seen the dollar decline versus the Japanese yen at the start of the week and believe that profit taking is one of the main reasons why the EUR/USD lost value on Monday for the first time in 7 trading days.
Unfortunately trading the FOMC rate decision is not a simple binary bet of hike vs. no hike. There are at least 4 different options for the Fed and in each of these scenarios, we expect a one-two move in the currency. The first move will be a knee-jerk reaction to the rate decision and the second will be driven by guidance.
Here’s a brief guide to four of the most likely scenarios with indications on how the dollar could react. We’ll talk about these more as the week progresses.
We are advising our clients to sell U.S. dollars ahead of FOMC, square up on the day of the event and wait for new opportunities after the announcement. Chances are that Janet Yellen’s testimony will trigger an explosion in volatility and a break of trading ranges for many currency pairs.
USD/JPY could slip as far down as 119 ahead of the FOMC rate decision if the Bank of Japan leaves monetary policy unchanged and signals no plan to increase Quantitative Easing Monday night. Unfortunately, that's a big 'IF' because Japanese government officials have been calling for more QE given the low level of inflation and patchy growth. The BoJ has moved further away from meeting its goal of 2% inflation so while the chance of an increase Monday was very slim, the central bank could suggest it is open to the idea of more monetary stimulus, which would be negative for the Japanese yen. However policymakers may want to see the updated growth and inflation forecasts at the end of October before shifting their guidance. Waiting until next month also allows them to see how the market reacts to September's FOMC announcement.
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FOMC Preview: Hike Or Hint - Credit Suisse
Credit Suisse' central view for the September 16-17 FOMC meeting is for no hike, and that we may see forward guidance hinting that a hike is being considered for the October or December meetings.
"This week is considered a close call though. If domestic data alone were the issue, we'd be inclined to lift off in September. But the timing of policy lift-off has become largely contingent on global conditions and financial market volatility, and in their view, these have combined to more than offset the good domestic news," CS argues.
"As a result, the balance has tipped towards no rate hike on September 17. Our baseline forecast assumes a December 16 lift-off," CS adds.
Market Implications:
"In rates, we expect no hike in September and a statement with guidance toward October or December lift-off to translate into higher front-end rates and a flatter real curve. We favor expressing this via shorting EDM6 and maintain our 5s30s real rate flattener recommendation," CS projects.
"In FX, We remain bullish on the USD. While an FOMC decision with no hike and no signal of upcoming tightening could cause the USD to temporarily lose some ground against other G10 currencies, we think the poor growth outlook in the EM world would make any USD sell-offs short lived, in our view. We remain broadly long USD in our portfolio," CS adds.
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This FOMC will be something. The moment they say "no hike" - worse than SNB
FOMC Preview: Expect Higher USD Vs Core Low Yielders - ING
ING preferred scenario for today's FOMC rate meeting sees the Fed refrain from a rate hike, manage expectations for an October hike, but deliver a benign outcome for risk assets with a suitably gradualist/dovish outlook.
"This should generate a modest bearish flattening of the US yield curve. This curve move will have been a long time in coming and for many, including ourselves, has been the rationale for forecasts of a stronger dollar against the low yielding currencies," ING argues.
"The dollar should outperform against the QE practitioners of JPY, EUR and we think now CHF as well. In short, we remain broadly positive on the dollar and retain a 1.05 EUR/USD target for year-end," ING projects.
Fed Dot Plot Hints at Single Hike This Year
The Summary of Economic Projections (SEP), as the quarterly forecasts are officially known, from the 17 Federal Reserve governors and regional presidents showed most policymakers now expect to raise rates only once this year.
By the end of the year, the federal funds rate should be around 0.375%, according to the median estimate in September, implying just one 25 basis point hike compared to the current levels.
There also appeared to be a wider consensus about the forecasts than three months ago when the median forecast was 0.625%, implying two hikes this year.
In an interesting development, one official actually preferred additional easing of the policy rate.
For the next two years, the path of interest rates was unchanged, according to the fresh projections. Next year, the fed funds rate should rise 1.625% before hitting 2.875% by the end of 2017, officials reiterated.
Policymakers also kept their estimate of the most likely rate at the end of the tightening cycle at 3.75%.
Jobs, GDP, inflation
Besides the infamous dot plot, the participants also updated their prognoses for a trio of key economic variables.
The economy as measured by the GDP should grow slower this year and next, reflecting the drag from a stronger dollar as well as a deterioration in the global economic momentum.
Also, the rate of inflation tracked by the PCE index, should be lower this year, although the central range forecasts for the core version of the gauge remained unchanged, but the median actually increased a notch to 1.4% from 1.3%
The jobless rate should fall lower this year as well as in 2016 and 2017. Furthermore, officials also revised down their estimate of where the natural level of the jobless rate might be to a range of 4.9% to 5.2 from a range of 5.0% to 5.2%.
That was the second adjustment this year and essentially showcases that the jobless rate is underestimating the amount of slack left in the jobs market.
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September FOMC: Not Now, But When? - Barclays
The following is a selection of Barclays Capital's reaction to today FOMC policy decision.
The September FOMC statement and projections were broadly in line with our expectations. The committee upgraded its assessment of economic activity, in line with the stronger pace of incoming data. It described economic activity as having expanding at a moderate pace. The FOMC sees a range of labor market indicators as suggesting that labor market slack continues to diminish, with solid job gains and declining unemployment.
The majority of participants continue to expect at least one rate hike this year. In addition to the negative rate expectation, three other participants project an end-2015 funds rate of 0-25bp, while six members expect two or more rate hikes this year. Elsewhere in the SEP, there was a decline in the FOMC members’ estimate of NAIRU, which they moved down to 4.9-5.2%, compared with 5.0-5.2% in June. Members sharply lowered their estimate of long-run GDP growth to 1.8-2.2%, compared with 2.0-2.3% in June. Longer-run inflation expectations were unchanged relative to June; their expectation for 2016 is slightly lower.
We expect the FOMC to signal a December lift-off, and the dots are one way to show conviction about lift-off this year. Although we see the statement as slightly more dovish than expected, we believe the majority of participants expect to hike rates this year. That said, we stand by our call for a March lift-off, as we continue to believe that the weak profile of inflation early next year will eventually push the FOMC out of 2015.
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US Fed Will Hike Rates Before Christmas: RBA Stevens
Glenn Stevens, the Governor of the Reserve Bank of Australia (RBA), believes that the US Federal Reserve (Fed) will raise interest rates before Christmas.
Fed officials decided to keep the federal funds rate targeted in a range between 0% and 0.25% on Thursday; evidence of their uncertainty over the economic outlook.
Contrary to some suggestions that the Fed now might not act until 2016, the RBA chief thinks that the US central bank will raise rates either at its October meeting or in December.
"I would still think an increase in the Fed funds rate is probably going to happen this year. The majority of FOMC members still think that they're likely to start raising this year, there's two meetings left," Stevens said at a parliamentary hearing in Australia's capital.
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