Markets Post-FOMC And Ahead Of BoE - Views From Major Banks
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Markets Post-FOMC:
BofA Merrill: The Fed signals a December hike: Targeting EUR/USD At 1.08 Into Year-End
The FOMC made a number of changes to the language to signal increased comfort with a near-term hike. We think this sets the stage for the Fed to hike in December, all else equal. Or course, the outcome of the Presidential election could impact Fed policy. Based on the latest polls, Hillary Clinton is still favored to win, but the margin of victory has narrowed. Assuming the baseline scenario of a Clinton presidency and Republican majority in the House, we think the coast will be clear for the Fed to deliver a hike in December.That said, the Fed will be quite sensitive to financial conditions after the election...FX: views unchangedThere was little for FX markets to chew on in the FOMC decision/statement, and currencies were on net generally little moved in the immediate aftermath. With Fed expectations still in place, it may well turn out to be the ECB following through with a December QE extension that will be key in terms of moving towards our near-term year-end EUR-USD target of 1.08. But of course, like all markets, we continue to condition our views on the tumultuous US election, where a one-party sweep presents the primary risk to our views.
Barclays: Upgrade Of Inflation Signals December Action.
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 also maintaining flexibility to delay action, should events in the next two months not materialize as expected. Our read of the statement suggests that the Fed achieved these goals and we continue to expect a rate hike at the December meeting
SEB: Nov FOMC: Small Tweak Points To A December Hike.
None of the 90 economists surveyed by Bloomberg expected a hike at the FOMC meeting that concluded today and as expected Fed did not hike interest rates. While there were only small changes to the statement, the committee still managed to subtly signal that an increase is moving ever closer. According to the November statement, the case for an increase has continued to strengthen where “continued” was a new addition compared to the mid-September statement. Yet another addition to the forward guidance was the Fed decided to wait for some further evidence of continued progress towards its objectives. As such, the Fed refrained from explicitly reference the next meeting but is nevertheless clearly eying a move in December. Against the uncertain election backdrop, one may well say it was prudent not to cement expectations for December at the juncture. On the condition that Clinton wins our forecast is for a December hike; the chance of Clinton winning the election is currently 75 per cent according to Project 538.
Danske: We Still Hold The Non-Consensual View Of No Fed Hikes This Year.
For some time, we have had the non-consensual view that the Fed will not raise the Fed funds target range this year. Although the probability of a December hike has definitely increased, as economic data have been better than we had expected, we still think it is too early to say a December hike is a done deal, as there are still valid arguments for not hiking at all this year.
BNPP: We Now See A 75% Chance Of Dec Hike Up From 65% Pre-FOMC.
The FOMC kept rates unchanged at its 1-2 November meeting, as expected. The Committee moved a little closer to the next hike, but is still data-dependent. We see about a 75% chance of a 25bp hike at the 12-13 December meeting, up from 65% before today’s statement. The Committee still considers near-term risks to the economic outlook to be “roughly balanced”, and continues to closely monitor inflation indicators and global and financial developments. The case for an increase in the federal funds rate “continued to strengthen”, but the FOMC “decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” The addition of “some” was significant and confirms we are closer to the next hike than we were in September.
RBS: A Genuine Desire For Dec Hike But 'A Lot Can Happen'.
At today’s meeting the FOMC left the funds rate unchanged (as universally expected). The FOMC made few changes to the policy statement. ...The market’s pricing of the probability of a rate hike in December was higher after the FOMC statement. According to Blooomberg, the market-implied probability of a December fed funds hike is currently 78.0%, up from the 68.8% prior to the release of the statement. As we have said repeatedly, we don’t doubt the desire of some (perhaps many) on the FOMC to nudge rates higher before the end of the year. The question is whether financial market and economic conditions will allow them to do so. A lot can happen.
Markets Ahead Of BoE:
Barclays: No Change; Further GBP Stability Likely.
Markets will be focused on Thursday’s Bank of England Inflation Report; we do not expect any change in policy settings, in line with the consensus. We think Vlieghe and Haldane will dissent and vote for a rate cut but that there will be a unanimous vote for no change to the size or composition of the QE programme. FX markets will likely pay close attention to the Bank’s discussion of GBP pass-through to headline inflation. Indeed, Governor Carney suggested last Tuesday at a House of Lords hearing that the BoE is “not indifferent to the level of the exchange rate”. While this comment comes when realised inflation is increasing and market-measures of inflation expectations have risen sharply, we do not believe either of these has been driven by post-Brexit GBP weakness. When the effect of this depreciation does appear, we maintain our view that it will be relatively small.
RBS: We Revised Our Call For No-Cut In Nov.
We have revised our BoE forecast: we no longer expect a 15bp cut in Bank Rate to 0.1% in November. The change reflects the ongoing depreciation in sterling and slightly firmer-than-expected activity data (notably the Q3 preliminary GDP outturn). Although we expect the MPC’s CPI projections to be nudged higher at the 2-3 year forecast range (by 10-15bp), we still expect further policy easing: a 15bp rate cut and a £60bn QE extension in February 2017.
BofA Merrill: QIR To Drive GBP Consolidation; Rallies A Sell.
An upgrade to growth and inflation forecasts in the QIR should reinforce the consolidation theme that we have recently highlighted. Our analysis suggests scope for near-term GBP consolidation but we continue to favor selling GBP rallies in anticipation of GBP/USD marking new lows in 1Q17. However, we do not think that data will be the main driver for this consolidation. The price action following the release of 3Q GDP was telling: despite stronger-than-expected growth figures, GBP was unable to sustain its gains. This is consistent with our analysis: the rolling correlation between GBP TWI and UK macro data surprises remains in negative territory: markets do not appear to believe the recent strength in UK data will be sustained. We do not think it will lead to an immediate change in the Bank of England’s reaction function though acknowledgement of recent stabilization in data and inflation upgrades may provide some respite. Looking further ahead, it is open to debate for how long markets can ignore stronger data and we are alert to the dynamics of lead indicators, but for now we think near-term GBP consolidation will be driven by other factors such as oversold technical and momentum indicators and some near-term alleviation in the political premium, which has played a dominant role in GBP price action. An interesting side angle to the QIR will be the press conference, which is likely to focus on this weeks’ announcement that Governor Carney will extend his tenure by another year to 2019. We think it will be of interest as to how and by whom that decision was driven
Credit Agricole: BoE's Carney To 'Talk Up' GBP On Thursday
This week’s inflation report will attract considerable attention with investors keen to know how the growing risk of stagflation in the UK (eg, weak growth and soaring inflation) will affect the bank’s policy outlook. We suspect that the MPC will revise its inflation projections to the upside while revising its annual growth projections for 2017 down (in part to account for the stronger economic performance since the EU referendum). The projections need not point at imminent stagflation, however. In addition, we suspect that the MPC will want to convey the message that they are still able and ready to ease again if needed. Even so, the Governor will also highlight that any surge in inflation, on the back ‘substantial’ FX depreciation, can severely limit the bank’s ability to respond to future economic shocks. We believe that Carney will use the IR conference to talk up GBP and highlight that the prospect for any future easing will depend upon the future path of the currency. This could help support GBP if only because it will be seen as delaying future BoE easing. Needless to say, this can only be positive for GBP so long as investors do not think that the UK economy needs further stimulus.
BTMU: BoE To Upgrade Growth Forecasts; GBP To Stabilize From Current Levels.
The BoE uses a similar forecasting model to the NIESR and hence we can assume roughly similar increases in growth projections from the BoE tomorrow when it releases updated forecasts in the Quarterly Inflation Report. We agree with the NIESR that the BoE will not have to ease monetary policy again as it looks through the temporary spike in inflation due to pound depreciation. We would argue that purely on what’s possibly priced in terms of the economic growth outlook, a 1.4% growth rate following a 2.0% growth rate this year would be impressive and surpass current market consensus. An average 2-year growth rate of 1.7% would be a sign of a remarkable degree of resilience in the face of Brexit uncertainty. We continue to believe that the scale of pound depreciation has over-extended and the longer we stabilise around current levels the greater the risk becomes that we will see a liquidation of short GBP speculative positions and a recover of the pound against both the dollar and the euro.
Uni-Credit: Almost Certain A Dovish Hold From The BoE.
Tomorrow, the Bank of England will simultaneously publish the November Inflation Report, the MPC policy decision and the MPC minutes of its meeting ending later today. We expect the MPC to leave the stance of monetary policy unchanged, in line with financial market expectations. In terms of the voting, we see seven out of nine MPC members voting in favour of maintaining the bank rate at 0.25%, with two members (Haldane and Vlieghe) favouring a cut. All members are likely to back a continuation of the asset purchase programs, although reluctantly so by Forbes and McCafferty
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