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Goldman Sachs: A 90% probability of December hike
Later today, we get the November FOMC minutes which we will be watching for any further indications of a rate hike in December. We see a 90% probability of December hike, and, looking ahead, we forecast three hikes in 2017, putting the funds rate range at 1.25-1.50% by the end of next year.
BNPP: FOMC minutes should not impact the USD.
The FOMC minutes are likely to signal increased comfort in a December hike even against the background of political uncertainty in this pre-election meeting. However, with a December hike fully priced and expectations for next year dependent on fiscal policy developments, USD benefit may be muted. Michigan sentiment data for November will provide some insight into any impact on consumer behaviour from the election results. Our position indicator has highlighted that USD long positions have now reached their most extended level since early 2015 and with a December Fed rate hike now fully priced, it makes sense for the USD to consolidate a bit now vs. the core currencies. We think the USD has more scope to extend gains vs. the commodity exporter currencies in the near-term, particularly if the risk environment turns and if oil prices retreat following the weekend OPEC meeting.
SocGen: Any surprise would shake December as a done deal.
The market prices a December rate hike as a 'done deal' so what matters is bow data and Fed comments affect pricing further out. The market does now (just) price a Fed Funds rate above 1% at the end of 2017 as a better than 50% chance, but those odds may need to rise from the current 51% to really propel the dollar higher in the near term. As for today, the surprise, clearly, would be a set of Minutes which question the conviction in a hike next month. we can't see it happening but that really would put a cat among the pigeons!
TD: Uneventful minutes.
On the policy side, we think the FOMC minutes will be uneventful for markets. This reflects current market pricing, which is nearly fully priced for a hike next month. Recall, recent speeches from Fischer, Yellen and other members signaled that December is largely a done deal. For another, the minutes are usually dated and backward looking. Indeed, with strong incoming data, favorable financial conditions and Fed commentary all still supportive of a nearterm rate hike, the minutes will do little to alter market participants expectations of December. It is possible that the balance of Committee members in favor raising rates at the next meeting could attract attention, but we think the market response to such anecdotes will be muted.
Credit Agricole: FOMC minutes dated by the elections
The November FOMC minutes should underscore the reasons for waiting a little longer before the next rate hike. As the statement suggested the Committee saw the case for tightening as having strengthened further. That said the majority also judged that there was room for the labor market to improve without putting significant pressure on inflation and that the risk of falling behind the curve remained low. The minutes are probably going to give a little more weight the hawks than the statement, whose argument was likely that waiting too long generated the risk of a policy target overshoot and a need to tighten abruptly down the road. We suspect that the minutes will neither alter expectations for December where a hike is fully priced in nor tell us much about 2017 since the election result has altered economic expectations. All of this suggests limited reaction in rates and FX markets just ahead of the holiday.
Barclays: Minutes to show Fed Comfortably waiting for December.
As was widely expected, the November FOMC meeting was uneventful. Heading into the meeting, we felt the Fed had two main goals: to keep expectations centered on a December rate hike, while maintaining flexibility to delay action, should events in the next two months not materialize as expected. We believe that the Fed achieved these goals. Although a few members likely called for a November rate hike, we think most members were likely comfortable waiting for the December meeting, given the proximity of the US election. We look to the minutes for the change in forecast that underpinned the FOMC's modest upgrading of the inflation outlook.
UniCredit: Minutes to bolster the view of a December hike.
The minutes of the 2 November FOMC meeting will likely show that support for a rate hike among committee members has increased further since September. This further bolsters our (and the market's) view of a 25bp move in mid-December.
FOMC Minutes: Most Fed officials saw rate hike appropriate 'relatively soon'
FOMC Minutes for the November 2 Fed decision
Most of the voting policymakers backed holding off on rate increases "for the time being," according to the minutes, a view that was reflected in the language of the Nov. 2 policy statement.
"Some participants noted that recent committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting," the Minutes said.
Overall, the Minutes have a much more cautious tone than Fed fund futures pricing but the market is largely priced based on what has happened since the election while the Fed meeting came before the Nov 8 vote.
Initially, the US dollar has ticked 15-20 pips higher. To me, that's more reflective of bids that were waiting in the wings than anything in the headlines.
Digging deeper into the Minutes, there is an interesting discussion about QE holdings and reserves used to maintain the Fed funds target.
"With the supply of reserve balances expected to remain large for a while, the present approach to policy implementation would likely remain appropriate for some time," the Minutes said. They also reiterated that decision regarding to the overall policy framework "would not be required for some time."
Nov FOMC Minutes: Fed On Track To Hike In Dec; Not Much Market Reaction
The Fed's most recent statement was light on changes, but the markets heard the message loud and clear. The minutes of the meeting only confirm that the Fed is ready to tighten policy in December, with most members seeing a rate hike as being appropriate 'relatively soon'. Moreover, some officials saw a December rate hike as important to Fed credibility and even saw the economy as already having reached maximum employment. That said, there are reasons to believe that the pace of tightening will be gradual. Several officials judged there is still appreciable slack in the labour market, in direct contrast to those who believe that further gains will push the economy through full employment. Moreover, some Fed officials remain wary of tightening too early, with monetary policy so close to the lower bound.
All told, not much new was revealed in the minutes, and it shouldn't garner much market reaction. The Fed is still on track to hike December, with further evidence needed to consolidate the current divergence in opinions.
Nov NFP: Mixed Bag But Fed Still On Track To Hike In December
The jobs report for November was quite mixed. Employment grew by 178,000 in November in line with the recent trend and without any major revisions to the previous months. The unemployment rate fell against expectations, from 4.9% to 4.6%, but this was due mainly to a fall in the labour force, so it fell for the wrong reason and we could see it bounce back in coming months. This said, it does not change that the unemployment gap is closing but jobs data are volatile just like other economic data releases. The most disappointing part of the jobs report was average hourly earnings, which fell 0.1% m/m in November – the first fall since December 2015 and the biggest decrease since December 2014. The annual growth rate fell back to 2.5% y/y from 2.8% y/y. While we think the fall was just a fluke, the Fed monitors wage growth closely, as higher wage growth is a key determinant of the number of Fed hikes.
Despite the mixed jobs report for November, a Fed hike in December still seems very likely to us. If we strip away volatility in economic data, we think the combination of better US economic data after the slowdown in H1 16, a tighter labour market, a global economy entering 2017 with synchronised recovery and calm financial markets should be more than sufficient for the Fed to feel confident about raising rates. As everyone expects the Fed’s next rate increase to come at the December meeting, the most interesting question is how many Fed rate increases to expect in coming years, especially as we expect Donald Trump to ease fiscal policy significantly.
As the FOMC turns more dovish next year due to shifting voting rights, we expect the Fed to offset Trump’s more expansionary fiscal policy only partly despite the output gap being already nearly closed. Many of the dovish members (including Fed Chair Janet Yellen) have said that it may be a good idea to let the economy run a bit hot to undo some of the structural damage to the economy caused by the financial crisis. This jobs report shows there is still room for higher wage growth. Besides higher actual core inflation, we think higher wage growth and lower unemployment rate are among the triggers to determine when the Fed hikes the next time in 2017 after the December hike.
We expect the Fed to hike twice a year, i.e. a total of five hikes from now until year-end 2018 (including a December hike). As the markets have also bought into the story that Donald Trump will ease fiscal policy to boost growth, we have seen a significant repricing of the Fed. Markets have now priced in a total of four and a half hikes before year-end 2018 compared with two before the election.
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New York Fed President Dudley (FOMC voter) speaks: New York Fed President Dudley will present the macroeconomic outlook. We expect him to see a December rate hike as likely, given his view that the economy continues to perform well.
Chicago Fed President Evans (FOMC non-voter) speaks: Chicago Fed President Evans speaks on economic conditions and monetary policy. Evans has drifted back to the more dovish side of the FOMC; nonetheless, in recent comments, he noted that three rate hikes by the end of 2017 will likely be appropriate.
St. Louis Fed President Bullard (FOMC voter) speaks: St Louis Fed President Bullard will speak on the economic outlook. Bullard believes that one more rate hike is likely appropriate. He maintains his “regime based” forecast and believes that under the current regime a single rate hike is all that is warranted. He sees December as “a reasonable time” to raise rates.
Will The Fed Kill The Dollar Rally?
With 3 centralbank rate decisions on this past week’s calendar, it has been a very lively week in the foreign-exchange market. The greenback traded higher against all of the major currencies, rising to its strongest level versus the Japanese yen in 10 months. Since no major U.S. economic reports were released over the past week, USD's rally was driven entirely by the renewed momentum in U.S. yields and decline in U.S. bonds. What’s interesting about the move in yields and rise in the dollar is that it was sparked by the European Central Bank’s rate decision. When investors realized that the ECB has no immediate plans to unwind its bond-buying program, U.S. yields shot up and the dollar soared. This momentum continued into Friday and the strength was validated by the stronger University of Michigan Consumer Sentiment report. The Federal Reserve is the only major central bank even thinking about raising interest rates in an environment where other central banks are actively considering more easing or have plans to keep policy steady for a long period of time.
However the market’s outlook for the dollar could change dramatically next week if Janet Yellen suggests that it may be a number of months before the Federal Reserve raises interest rates again. We have every reason to believe that the Fed will announce a quarter-point rate hike on Wednesday and according to Fed fund futures, which is pricing in a 100% chance of a move, it would only be a surprise if the Fed holds rates steady or tightens by 50bp -- neither of which is likely. The big story won’t be the hike but the dot-plot forecast and Yellen’s guidance. The dollar will rise if the dot plot shows expectations for more than 2 rate hikes in 2017 (the last plot had Fed presidents looking for 50bps of tightening next year) and could fall if expectations stay at 50bp. There have actually been widespread improvements in the U.S. economy with consumer spending up and cpi on the rise. Donald Trump’s victory in the U.S. presidential election was a game changer for financial markets. U.S. stocks, which had been falling, reversed course and hit a record high while U.S. 10-year Treasury yields broke above 2% for the first time in 11 months. The dollar soared 5% in response. These moves will impact the Fed’s policy plans because the sharp rise in yields and the stronger dollar tightens the economy by raising borrowing costs and making exports more expensive. This in turn reduces the immediate pressure on the Fed to raise interest rates again and explains why the chance of another rate hike beyond December -- according to the Fed Fund futures -- does not exceed 50% until June 2017.
But the dollar's fate still lies in Yellen's hands. If the Fed raises interest rates and Yellen refuses to hint at a timetable for future tightening and simply says it is data dependent, the U.S. dollar will fall. Given how quickly and aggressively the U.S. dollar has appreciated over the past month, profit taking is long overdue. While part of the move can be attributed to Donald Trump’s spending plans, he's not yet president and the markets are moving like he’s already rolled out a major fiscal-spending program. Structuring the program and getting it past Congress could take much longer than the new president expects and the eventual package may be far less impressive as members of the Senate worry about financing costs. So if Janet Yellen fails to convince the market that rates will rise again in the first half of the year, we could easily see a 1-2 percent correction in the dollar in the days that follow -- and the greatest losses will be in USD/JPY.
While the Federal Reserve monetary-policy announcement is the main focus next week, there are 2 other monetary-policy announcements and a laundry list of market-moving event risks, including consumer spending, employment, inflation and PMI reports. Next week is the final push in volatility before the markets move into year-end mode. The Swiss National Bank’s monetary-policy decision is not a big market mover but investors will be watching the Bank of England rate decision carefully. This past week, Governor Carney repeated the central bank’s view that it had only limited tolerance for an overshoot of inflation. If this hawkish comment is emphasized at next week’s meeting, we could see renewed gains in sterling, particularly against the euro. Since the BoE last met, slower manufacturing activity was offset by stronger service-sector activity and a sharp rise in retail sales. Before Thursday’s rate decision, we’ll learn about the latest inflation, employment and retail sales conditions -- all of which will help shape the market’s view ahead of the monetary-policy announcement.
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Week Ahead: Will The Fed Tolerate A Stronger USD For Longer?
Given that US financial conditions have tightened of late, investors will also want to know if the Fed will tolerate further tightening (eg, USD appreciation). The Fed should deliver a 25bp rate hike but may keep its economic and policy outlook little changed, opting to wait for more economic data and details on the upcoming Trump stimulus. At the same time, Yellen may signal willingness to tolerate further tightening in US financial conditions in view of the latest rebound in US inflation expectations and given the resilience of risk sentiment at home and abroad.
Given the latest USD underperformance, the bigger surprise for the FX markets could be indications that the Fed would tolerate higher UST yields and a stronger USD for longer, as well as any potential revisions to the 2018 dot-plot to reflect the recent drop in the unemployment rate below the Fed's NAIRU.
This could help USD regain some lost ground vs commodity and risk-correlated G10 currencies if further tightening in global conditions starts eroding market risk sentiment. AUD could be vulnerable to potential disappointments from the upcoming data out of Australia and China. We keep open our short AUD/USD trade.*
The BoE, the SNB and the Norges Bank will also meet next week but should keep policy unchanged. That said, the MPC could see the latest disappointing UK data as confirmation of its cautious macro outlook and reiterate it will keep policy very accommodative in the face of surging cost–push inflation. This could keep the headwinds in place for GBP against USD. EUR/GBP could start consolidating after the recent sell-off following the Italian referendum and December ECB meeting.
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US Dollar Reactions through the Federal Reserve Meeting
The US Federal Reserve's Open Markets Committee meets in Washington on December 14 to discuss the setting of interest rates. Here is how the Dollar could react.
Surprises, revolutions, revaluations and acts of God are the ‘four horses of the apocalypse’ for financial markets.
In a word the “unforeseen”.
If investors can see it coming they have time to prepare and prices adjust before the event.
That’s why the Dollar is unlikely to be moved much by the interest rate that has been priced in by market on an almost 100% certainty.
The biggest response would come from the Fed deciding not to adjust interest rates - and that is highly unlikely.
The Dollar would plummet if the Fed shied away from raising rates.
Still, it’s not completely impossible: note the poor earnings data contained in the November jobs report.
Whilst slowing wages was not seen as a game-changer, it will have given Fed governor Yellen food for thought.
Nevertheless, the bottom line is that there is going to be a Fed rate hike, so if not that, then what could move FX on the day?
Future Expectations
Given a rate hike is already something of a foregone conclusion, markets will be looking to formulating an idea of how many rate rises the Fed is likely to make in 2017, say analysts at Bank of America Merill Lynch (BOFAML) in a note to clients:
“Similar to the market response after the December 2015 hike, the key for the FX market will be the signal of the pace of hikes in 2017 and 2018.
“The main determinant here will be the dot plots, statement press conference tone as well as any nod (implicit or explicit) to the recent tightening of financial conditions amidst higher yields and a stronger USD."
Plotting a Course
The Federal Reserve ‘Dot Plot’ will be key in determining the market’s reaction to the event.
The Dot Plot is a chart published on the Fed website which shows when each member expects the Fed to raise interest rates in the future, it is updated at key meetings.
BofAML do not expect a change in the Dot Plot from September, however, they see a higher chance of the dots rising than falling, reflecting greater expectations amongst members of higher interest rate levels in the future.
BofAML’s Athanasios Vamvakidis notes:
“There is a better chance of a move higher than lower in the trajectory.
“We think the dots for next year are the most vulnerable – by our calculation, only 2 members need to shift the dots higher to move up the median expectation for 2017.
“It is possible that stronger Q3 GDP growth and a drop in the unemployment rate have prompted some members to adjust their forecast."
Any move up in the dots would lead to an appreciation in the US Dollar.
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FedWatch: Focus Shifts From December Rate Hike to Clues About Future Policy
With the Federal Reserve widely expected to raise interest rates this week, just how fast policy tightening will occur will be the all-important question moving forward.
The Federal Open Market Committee (FOMC) will begin its two-day policy meeting on Tuesday, with the official rate announcement scheduled at 2:00 pm ET the following day. Markets are pricing in a nearly 100% chance of a 25 basis-point rate increase, the first of its kind since December 2015, according to the CME Group’s Federal Funds futures prices. The official rate statement will also be accompanied by revised central bank projections for GDP, unemployment and inflation.
However, investors hoping for more clarity about the pace and timing of future rate adjustments will likely have to wait until the new year when the central bank has more intel on President-elect Donald Trump’s proposed tax cutting and infrastructure spending plans. Fed Chair Janet Yellen told Congress last month that Trump’s proposed measures could stoke faster inflation in an economy that has seen very little of it since the recession.
Market participants took this to mean that the central bank’s policy tightening schedule may accelerate to keep up with rising cost pressures. This makes 2017 a highly pivotal year for observers of US monetary policy.
That being said, the Fed’s 2016 lineup is considered much more hawkish than in previous years. The hawkish cast will be replaced next year by more dovish voices, which also has to be factored in by investors monitoring interest rate policy.
Each year, four of the Fed’s 12 regional presidents become voting members of the Federal Open Market Committee alongside the other permanent members. This year, three of the four regional presidents – Esther George of Kansas City, Loretta Mester of Cleveland and St. Louis’ James Bullard – are widely viewed as hawks. In fact, George and Mester have already voted in favour of raising interest rates.
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This Week's FOMC Likely To Be A 'Non-Event'
In line with market expectations and what is already priced-in Fed Fund futures, we expect the Fed to raise the target range for the federal funds rate by 25bp.
This decision has been very well telegraphed, and therefore, we do not expect any material effect unless the committee decides to send a strong message regarding the likely path of monetary policy, something that we see unlikely at this stage.
The committee will also release updated projections and we look for these to be little changed relative to September. We expect a median of two rate hikes in 2017 and 2018, a forecast that would be broadly in line with our own expectations. Regarding any potential fiscal stimulus and associated effect on the outlook, past practice suggests that the Fed will not price in any change in fiscal policy this far in advance. In line with Central Banks, we think it is unlikely that the Fed would give guidance based on speculation, but rather would wait until specific policies to be announced before assessing its likely effect in the US economy.
We expect Chair Yellen to balance the decision to raise rates with a dovish message of a shallow expected policy path and a willingness to test the potential benefits of running a "high pressure" economy.
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