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Trading the FOMC Minutes - Views from 11 major banks
TD: Market To Assess Scope For Hikes Beyond This Year; USD Downside Risk Vs CAD.
The focus today turns to the September FOMC minutes. Indeed, with markets largely pricing a move before year-end, we think markets will assess the scope for future rate hikes beyond this year. We doubt the minutes will signal broader intentions for next year, in particular with the debate around the decline in the r*. We think leaves the greenback exposed to downside risks into the event with CAD a likely beneficiary of any USD correction. The level of oil prices is typically consistent with USDCAD below 1.30, but oil prices are competing with steeper curves and waning risk appetite. Intraday support for USDCAD seen near 1.320.
Credit Agricole: Signal From FOMC Minutes Crucial For 2017 Rate Path; USD Rally Intact.
In the US, the minutes of the September FOMC meeting are likely to show the extent of the debate between the doves and hawks for what Vice Chair Fischer recently acknowledged was a "close call" decision. Dissenters George, Mester and Rosengren likely argued that the Fed should get on with removing accommodation since Fed has nearly met its employment mandate, while the doves such as Brainard, Evans and Tarullo were likely to emphasize that there is little risk of an inflationary overshoot. Indeed, the discussion on inflation may be among the topics that the markets will be most sensitive to, given the recent pickup in core CPI and PCE measures. The relative odds of a hike at the November and December meeting, currently at 17% and 67% respectively, should not move much on the back of the minutes and a December hike remains our base case. That said, signals for the FOMC may prove important for 2017 given the recent steepening of the front-end of the US yield curve. While the doves have won the day at the September meeting, we suspect that with an ongoing bond-market sell-off in the background markets may be more alert to the arguments of the hawkish camp, keeping the USD's current bullish momentum intact.
Barclays: Minutes To Reveal Widening Divisions Within The Committee
Given the three dissents in favor of a rate hike at the FOMC's September meeting, we expect the minutes to reveal widening divisions within the committee over the appropriate stance of policy. On one side are those who believe a rate hike in September would have been warranted given that the economy is operating near mandate-consistent levels and mediumterm risks are rising. These concerns were expressed by regional Fed presidents Rosengren, Mester, and George in remarks leading up to, and following, the meeting. On the other side are those FOMC members, primarily within the Board, who point to a slower removal of labor market slack, via trends in participation and other variables, and a lack of evidence that inflation or financial instability are rising, as supporting a further delay in policy normalization.
BofA Merrill: Minutes To Show A Conversation About The Degree Of Labor Market Slack
The minutes from the September FOMC meeting are likely to reveal a heated debate about the appropriate course of policy. There were three FOMC officials - Kansas City's George, Boston's Rosengren and Cleveland's Mester - who dissented in favor of a rate hike at the meeting. At the other end of the spectrum, there were three FOMC officials who became more dovish, penciling in no hikes for this year. We think this divide reflects views around the costs/benefits of the Fed's accommodative policy. The three hawkish dissents were motivated, in part, by the belief that there are growing costs of easy policy including a misallocation of capital and potential brewing of asset bubbles. We therefore expect the minutes to reveal a discussion about the costs and benefits of keeping rates at the current low levels. We also think the minutes will show a conversation about the degree of labor market slack. Fed Chair Yellen mentioned that the committee believes that there might be more slack in the labor market given the recent rise in the labor force participation rate and stagnant wage inflation. This would be a reason for a slow and delayed cycle. Overall, the minutes will provide something for everyone and reveal the growing divergence of views within the committee.
SocGen: Minutes Could Keep USD Rally On Track.
US equity/bond correlation in the last month is almost exactly zero so it's not a given that higher yields will trigger a significant equity correction or that the equity correction will trigger a volte-face by the bond market unless it gets a lot more serious. We get the minutes of the last FOMC are released this evening (19:00 BST). The more resilient the equity market in the face of rising US yields, the more upside there is to USD/JPY. But generally, the latest dollar rally has its roots in rising UJS nominal and real yields and if fed minutes keep that on track, the dollar should keep on rallying.
BTMU: Minutes To Reveal The Strength Of Conviction For Moving In December
The minutes from the FOMC meeting in September will be released this evening and may shed some light on the extent of agreement or disagreement over the decision of the FOMC to maintain its monetary stance. The vote was 7-3 of course so there was clearly disagreement but the minutes may offer some indication of what specifically lay behind the reasons for caution. More importantly, the minutes might reveal the strength of conviction for moving in December and if strong could further support the dollar over the short-term, especially with the data calendar light today and tomorrow.
Scotiabank: A Hawkish Undertone Could Bolster Seasonal USD Rally
The real focus for investors today will be the September FOMC minutes at 2pm which will give investors a chance to gauge the level of dissent against holding policy steady at the meeting (recall three governors voted for a rate increase and Vice-Chair Fischer termed the decision a "close call"). A hawkish undertone to the minutes should bolster December Fed tightening probabilities; with one ¼ point tightening still not fully factored into the curve through the turn of the year, the USD can still make progress on the Fed story. We reiterate that the USD is entering a phase of the calendar year where it typically strengthens ; November and January are the two best months of the year overall for the DXY over the past 25 years on average but our analysis suggests that the USD rally usually starts to develop through mid-October - right around now.
Lloyds: Minutes Could Reaffirm The More Hawkish Messag
all eyes and ears are now on the minutes of the 20-21 September FOMC meeting this evening and whether they reaffirm the more hawkish message that near-term risks to the economic outlook 'appear roughly balanced' and that 'the case for an increase in the Fed Funds rate has strengthened'. Also worthy of note will be their reasoning behind the more gradual expected pace of tightening from next year, as well as a lower neutral rate.
HSBC: Mkt To Focus On The committee's disagreement Around The Timing of Next Hike
The September FOMC meeting minutes will be released later today, which will be keenly examined by the market in light of the meeting's three dissenters who expressed their preference to raise rates by 25bps. The market will be especially attentive to any indications of the strength of the committee's disagreement around the timing of the next rate hike, particularly given the statement acknowledged that the case for a rate hike had strengthened.
RBC: A Non-Event; Minutes Are Somewhat Dated.
The minutes of the September 20-21 FOMC meeting are due but they are somewhat dated, the probability of a 2016 hike having risen from around 65% at that time to around 75% now. Although three members dissented in favour of an immediate hike, the statement was still seen as falling short of the "hawkish hold" that many had expected at the time.
UniCredit: Mkt To Assess The Minutes For The Likelihood Of A December Hike
The release of the minutes from the latest FOMC meeting, held in September, will be closely watched to assess the likelihood of a December rate hike (20:00 CET). Recent rhetoric from Fed officials suggests that the committee set a pretty low bar for moving before the end of the year. In addition, the latest data, not only for the labor market but the broader economy (ISMs, consumer confidence and even durable goods orders), were easily strong enough to clear that bar.
Sep FOMC Minutes: No Change In View; Still See The Fed On Hold This Year
The FOMC minutes from the September meeting confirm that we are dealing with a very divided FOMC and that there is a ‘bird fight’ among the hawks and doves in the FOMC.
Hawks think that risks are that the economy overheats as employment has increased over the past six years and that low rates create financial instability. Doves think that there are signs that labour market slack has been larger than previously expected since the unemployment rate and underemployment rate have been flat for the past year. In their view, the Fed can afford to stay patient as core inflation runs below 2% and there is little sign of increasing underlying inflation pressure as wage growth is subdued.
We do not change our Fed call based on these minutes, as they confirm more or less what we already knew due to the many Fed speeches since the last meeting.
For now we stick to our non-consensus view that the Fed will stay on hold for the rest of the year, although it is a close call whether the Fed will hike or not in December.
The reason for our call is that the Fed seems too optimistic on Q3 GDP growth and we fear that economic data may continue to disappoint in the short term. Incoming data will be important for the Fed’s decision to hike or not later this year.
The combination of weak GDP growth over the past three quarters, still slack left in the labour market, subdued wage growth, low inflation expectations and core inflation continuously running below the 2% target, means that the Fed can afford to stay patient.
A November hike seems unlikely due to the Presidential election just a week after the next FOMC meeting. As the jobs report was not the smoking gun for the we are looking forward to Friday, when we get retail sales data for September and Fed Chair Yellen is due to speak. Both could be important for our Fed call, as retail sales have been weak in July and August and since Yellen sounded more dovish at the press conference after the September meeting than the tone in the FOMC statement. The market reaction to the minutes was muted. Markets have priced in a two-thirds probability of a hike by the turn of the year.
The vote to hike the Fed discount rate was 9-3 in September
Dissent grows at regional banks
Just three banks voted to leave the rate unchanged: New York, Minneapolis and Chicago. The vote previously was 8-4. It was Atlanta that switched sides in September.
The discount rate meeting was before the FOMC so Yellen & Co continue to flout the regional banks.
A potential outcome of the Nov 2 FOMC meeting may be a fourth dissent. That's something that would send a strong signal about a December hike.
Federal Reserve - BNP's "base case" is for a December rate hike
BNP's outlook for the FOMC through to the end of this year:
USD Into FOMC: Consolidation More Likely Than New Highs
We expect the Fed to stay on hold at the 2 November meeting.
As our US economist argues, the nearness of the Presidential election, in and of itself, would not necessarily preclude a policy move. However, recent data does not suggest any particular urgency to hike, and the Fed would likely prefer to keep a low profile and wait for the December meeting. Another strong reason to wait is that the Fed does not like to surprise the markets. While a December Fed move is now 70% priced in, markets see only a 20% chance of a November hike. The November statement would not need to undergo a significant change to be consistent with a December hike as the Fed had already signalled that the “near-term risks to the economic outlook appear roughly balanced” and that there is a stronger case for tightening policy.
There will also be plenty of US data to digest including the October non-farm payrolls report where our economists expect a gain of 185K.
The USD has been hanging on the coattails of the long-end of the US yield curve, but given the historical tendency of the greenback to underperform 1-2 weeks ahead of the Presidential elections we think a USD consolidation is more likely than new highs.
source
USD into FOMC: 'No tricks, No treats'; Two areas of focus
The November 2nd FOMC meeting should be considered a placeholder meeting.
If the Fed is successful, the meeting will likely come and go without much action in the markets. We think the Fed's objective is to signal that a hike is highly likely in December but that the path thereafter will be extraordinarily shallow. The market is pricing in a 72% chance of a December hike, which the Fed is likely to perceive as appropriate. Without a press conference or the release of the Summary of Economic Projections (SEP), the main form of communication is the statement.
There are two areas of focus: 1) statement of risks and 2) forward policy guidance.
We think the Fed will tweak both to show that Fed officials have become incrementally more comfortable with a nearterm hike than they were in the September meeting. One possibility is to change the risks statement to read "near-term risks to the outlook are roughly balanced", which would be a change from "near-term risks to the outlook appear roughly balanced". If the Fed wanted to go a step further, they could remove the word "roughly", but we think they will wait to do so until they actually deliver the hike in December. There are a number of potential changes that the Fed can make to the forward policy guidance statement. One possibility is to add the word "further" in front of strengthened to read: "the case for an increase in the federal funds rate has further strengthened". We also suspect that the Fed might want to remove the phrase "for the time being" since they are getting closer to delivering a hike. Importantly, we do not think they will turn to calendar guidance and explicitly mention that a hike is possible at the next meeting. The FOMC took this approach last October to signal a hike in December, but at the time the markets were only pricing in a 36% probability of a December hike. The Fed therefore likely felt it was prudent to take a more aggressive step toward calendar guidance in order to set market expectations. In our view, the Fed does not want to set a precedent of having to enact such strong signaling and will therefore avoid putting such language in the statement.
USD: a million risks but the Fed ain't one...
A 'placeholder' status of the November meeting means it is unlikely to have a lasting impact on the dollar. A more explicit Fed signal of a December hike at the meeting would support but not accelerate the near 3% move in the DXY since the September meeting, in our view. With the market already pricing over a 70% chance of a December hike, we are cautious on chasing the USD move from here.
Additionally, a number of risks between now and the meeting, including the US election, Italian Referendum, and the European Central Bank's December meeting area also a concern. If anything we see risks of some dollar consolidation near-term.
However, similar to the Fed's December 2015, we see risks skewed towards further USD strength in the aftermath of a December hike with the market pricing less than one additional hike by end 2017, too low relative to our expectation for June and December hikes. Furthermore, if the new administration pursues a more aggressive fiscal expansion, this would certainly tilt the balance of risks to more hikes, supporting the USD.
Nov FOMC: No Surprise; Little Change Only In First Paragraph
We expect the FOMC to leave the federal funds rate target range unchanged at 0.25- 0.50% at the conclusion of the 1-2 November FOMC policy meeting. The case and rhetoric for a rate increase this year continues to grow, but given that the election (which will be held the week after the November meeting) has the potential to move markets and the economic outlook, we think the FOMC will wait until the December meeting to raise rates.
We expect the FOMC to reveal little new information after the meeting, as there will be no press conference or update to participants’ economic outlooks (their “dots”).
Instead, there will only be a statement, and we expect that statement to be little changed from September’s. The “economic assessment” section (i.e., the first paragraph) will likely acknowledge that the economy continues to strengthen and that activity has picked up (GDP grew by 2.9% in Q3 vs 1.4% in Q2). Reflecting the details of the GDP numbers, the language for household spending may change from “growing strongly” to “continues to grow.” Also, the statement may nod towards stating that net exports have improved. We see little compelling reason that would force the Fed’s hand to edit its statements on risks: the risk assessment on the outlook doesn’t appear to have changed all that much since the last meeting, which it deemed to be “roughly balanced.”
We believe there is a small probability that the Committee could explicitly signal a rate increase for the next meeting like it did last October before raising rates in December 2015. However, we think that it’s unlikely. Given that markets are already pricing in a rate increase for December, we think that the Committee will forgo sending an explicit signal, because the FOMC may not want to set a precedent of constantly telling market participants that it’s likely to raise rates before it does so. Last, the three dissenting voting members (Mester, George, and Rosengren) from the September meeting will again likely vote against the action if the Committee decides to leave rates unchanged.
Beyond the November meeting, we continue to believe that the FOMC is on track to raise rates in December.
source
A slightly hawkish tilt: Fed to hike in December according to CIBC
No action but moving that way going forward.
ANZ on the FOMC: Clearly signalled fed funds target could rise in December
ANZ's Global Macro Insight piece in the wake of the November Federal Open Market Committee meeting
Fed’s Evans: December Rate Hike Reasonable, Inflation Concerns Persist
In comments on Tuesday, Chicago Fed President Evans stated that labour markets are strong and that consumer spending is picking up pace.
As far as inflation is concerned, Evans was relieved that inflation was making headway towards the 2.0% target with a rate of 1.7%. Nevertheless, he also commented that he would feel more comfortable in the process of monetary policy normalisation if there was greater confidence that inflation would reach the 2% level.
He remained concerned over inflation expectations with fears that expectations have moved down in a way that is not consistent with meeting the 2% inflation goal. He also wanted the Fed to provide reassurance that the central bank would not remove accommodation too quickly in order to support inflation expectations.
Evans also commented that it was not a crime to overshoot the inflation target and it is clear that the Chicago Fed President would promote at least a limited increase in inflation above the 2.0% level to help support the economy.
Nevertheless, he also commented that it was reasonable for the Federal Reserve to raise interest rates in December given the strength of the US economy. In his view, the overall fundamental outlook continues to look pretty good.
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