What To Expect From FOMC Minutes? Market predictions and reactions - page 16

[thenews]

Preview: Three reasons to expect a hawkish FOMC Why the US dollar will rally on the FOMC decision

The Federal Reserve will almost certainly leave interest rates unchanged at 2 pm ET on Wednesday but Janet Yellen may set the stage for a possible June hike by delivering a hawkish statement. Here's why:

1. Inflation expectations have improved

The Fed has always been skeptical of breakevens. When they repeatedly pointed to near-nil inflation, policymakers were quick to brush them aside, blaming liquidity. Over time, they've proven to be a better predictor of where inflation is heading and the Fed has warmed up to them.

By subtracting the 5-year TIPS from the 5-year yield, you get a good sense of where the market believes inflation will be. Five year breakevens are at 1.55%. That's still below target but it's the highest since July 2015 and that's good news for the Fed hawks.

2. The reasons for waiting have receded

'Financial conditions' is essentially a Fed code word for the stock market. When the Fed went to the sidelines in January and stayed there in March, officials were quick to blame financial conditions. Markets were roiled, commodities were under pressure and China was in flux.

Now those fears have almost-entirely faded and the S&P 500 is back close to all-time highs. Meanwhile, China has unleashed stimulus and oil is up 65% -- putting a dose of inflation to the pipeline.

At the same time, the labor market remains a pillar of strength. The economy added another 215K jobs in March and unemployment is at 5.0%; full employment isn't far off.

3. Fed credibility is at an all-time low

This is a bigger factor then it seems.

The Fed has been wrong for years but it's sent out very clear signals that it wants/plans to hike twice this year. The market has laughed in its face by pricing in only at 60% chance of one hike and just a 20% chance that rates rise in June.

The institution of the Fed demands that markets take it seriously and that's been lost, something that I wrote about last week.

The Fed almost needs to hike this year if it ever wants to hold sway in markets.

Reasons to stay dovish

Consumer spending and growth are worries.

The Fed expected a rise in spending as the job market tightened. It hasn't happened. The March retail sales control group rose just 0.1% compared to 0.4% expected and the key metric has been muddling along since December.

Meanwhile, inventory adjustments and trade are hurting overall growth. It's highly likely to be only a temporary blip but Q1 growth is forecast at just 0.6% in a report to be released Thursday. The Fed will likely get an early look at the data and that could sway the decision.

source

[thenews]

Janet Yellen, not only "Master of the Universe", also "Stabilizer of the Yuan" Federal Reserve policy ... its not all about the US This piece from Bloomberg points out how decisions taken at the FOMC impact on global markets, in this case China's yuan. It says stability of the yuan (i.e. not capital exodus from China) will be improved is the Fed keeps rates steady:

• A dovish Fed lowers the probability of a USD rally and a yuan slide, and thus no trigger for capital flight from China ... and on the other hand more hawkish and the thus supportive of the USD "could suck money out of China".
• "The Fed and China are stuck in an uncomfortable dance," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc. "This yin-yang of the Fed and the PBOC could thus reignite volatility down the road."

More here at the article

[Sergey Golubev]

How Politics and Central Banks Impact Forex Market (based on  the article)

• "For foreign exchange (“forex” or “FX”) traders, the constant background noise that politics represents is an inescapable blackhole. Traditional media drowns in punditry, while social media drowns in puns. It doesn’t matter what asset class you’re trading either.In recent years, even a single tweet from a politician has had the capacity to move not only currencies but also bonds,commodities, and equities. "
• "In an increasingly fractious landscape, traders need a framework by which to interpret information and understand political developments as they happen. After all, politics can become policy after enough time and effort. To this end, FX traders need a way to interpret information and political developments in the context of how fiscal policy could change and how that might impact their portfolios."
• "Market participants need to pay attention to more than just fiscal policy, however. With central bank activity having gained considerable traction during the Great Recession and thereafter, monetary policylooks to be a powerful lasting influence on markets. Therefore, FX traders need a viable framework to analyze both fiscal and monetary policy in tandem."

==========

[Sergey Golubev]

How different policy mixes lead to reactions in the Markets (based on  the article)

1. For high capital mobility economies, there are effectively four different sets of policy shifts that can provoke a reaction in FX markets. They are:
   Scenario 1: Fiscal policy is already expansionary + monetary policy becomes more restrictive (“tightening”) = Bullish for the local currency
   Scenario 2: Fiscal policy is already restrictive + monetary policy becomes more expansionary (“loosening”) = Bearish for the local currency
   Scenario 3: Monetary policy already expansionary (“loosening”) + fiscal policy becomes more restrictive = Bearish for the local currency
   Scenario 4: Monetary policy is already restrictive (“tightening”) + fiscal policy becomes more expansionary = Bullish for the local currency
   
   
2. It is important to note that for an economy like the United States and a currency like the US Dollar, whenever fiscal policy and monetary policy start trending in the same direction, there is often an ambiguous impact on the currency.
   
   
3. In other words, when viewed through the framework of the Mundell-Fleming model, when both fiscal and monetary policy are expansionary, or when both fiscal and monetary policy are restrictive, that currency is unlikely to see a significant directional move in the nearfuture.
   
   
4. Instead, armed with this insight, traders expecting a period of trendless oscillation in a given currency may be encouraged to set aside momentum- and trend-based strategies to adopt an approach optimized for range-bound conditions.

==========