What To Expect From FOMC Minutes? Market predictions and reactions - page 5
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Some are saying no rate hike. Some are saying double rate hike. The rumors war has reached its peak
FOMC Menu: Appetizer Ahead Of September’s Main Course
It’s hard to believe that it’s been a full six weeks since the Fed’s last meeting, where the median central banker just barely maintained a preference for two rate hikes this year. In the accompanying Summary of Economic Projections (SEP), the central bank negatively revised its expectations for economic growth and unemployment, while leaving the inflation forecast essentially unchanged.
From Jobs To Inflation
Over the last month and a half, the US economy has given off a series of mixed signals. We’ve seen solid growth in the labor market, with the NFP report showing that the US economy created another 280k jobs in June and initial jobless claims recently dipping to a 40+ year low. But the Fed has essentially shifted its focus from jobs to inflation in recent months. On the inflation front, the CPI reports have been on the weak side, with core prices rising 0.1% and 0.2% month-over-month in June and July respectively, while Core PCE rose 0.1% m/m in May and the BLS’s measure of Average Hourly Earnings was flat in June. The consumer has been similarly mixed, with personal spending edging higher, consumer confidence spiking toward 100, then falling back to 90.9 and retail sales missing expectations.
After putting all of these economic reports in a blender and setting it to puree, the central bank is unlikely to be any more optimistic on the economy than it was in June. While Fed Chair Janet Yellen took pains to emphasize that every meeting is “live” -- meaning the Fed could raise interest rates -- it will almost certainly refrain from making any functional changes to monetary policy on Wednesday. Indeed, even any substantive changes to the statement (note there will be no press conference or Summary of Economic Projections released this month) are unlikely.
Possible Dollar Rally
Instead, the central bank will likely emphasize that it remains “data-dependent” and that the committee would like to see further signs of improvement in price pressures before acting. In our view, the statement will still leave the door open just a bit for a potential rate hike in September, which the market is now pricing in at about a 19% chance. So a relief rally in the dollar is possible. One key wildcard for dollar bulls to pin their hopes on will be the monetary policy votes, with optimists crossing their fingers that Jeffery Lacker or another hawkish-leaning member of the Fed will cast a dissenting vote in favor of raising interest rates immediately.
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Barring such a surprise, the market impact of Wednesday’s meeting will likely be more subdued than usual, with forward-looking traders already looking past the FOMC to Thursday’s Q2 Advance GDP reading. In other words, we expect the FOMC to merely serve an appetizer, choosing instead to save the main course for September’s meeting.
FOMC Preview: Focus On The Language - UBS
While no rate hike is expected at today's FOMC meeting, the focus will be on the language of the statement, says UBS.
"UBS believes that a rate hike is likely only as late as September, but expects this week's meeting to provide language suggestive of a Fed rate hike in the next meeting," UBS projects.
"More specifically, UBS expects the Fed to point to the sustained growth in economic activity and positive momentum in labour data in its statement," UBS adds.
A bit more and we shall see
Fed Stays Undecided as Officials Seek Further Progress to Goals
The US economic landscape has improved since the last meeting of the Federal Reserve (Fed), but policymakers saw little changes on the inflation front and in fact expressed some worries over the renewed decline in oil prices.
The Federal Open Market Committee (FOMC), the main decision-making panel, decided to keep the target for the federal funds rate unchanged in the 0% to 0.25% range, the official statement from the bank showed on Wednesday.
Analysts had been widely expecting the Fed to keep policy on hold with most of them betting that the first increase in the policy rate since 2006 will come at the next meeting in September.
In order for that to happen, however, the FOMC will have to see some additional improvement in the labor market and achieve reasonable confidence that inflation will move back to its 2% objective over the medium term, policymakers said.
Policymakers noted that the labor market delivered "solid job gains" that led to a decline in unemployment, leading to a further decline in slack after the jobless rate sank to 5.3% in June, its lowest level since April 2008.
However, the statement was more dovish when it comes to the assessment of inflation trends, where officials acknowledged the recent commodities sell-off by omitting the phrase "energy prices appear to have stabilized."
Otherwise, the inflation assessment remained broadly unchanged compared to June after the latest reading on the core PCE index, the Fed's preferred measure of inflation, showed only a 1.2% increase year-over-year.
The FOMC still saw the risks to the outlook for economic activity and the labor market as "nearly balanced."
On the upside, the FOMC upgraded its description of the housing sector, which has shown "additional" improvement. Household spending continued to be moderate while business fixed investment and net exports stayed soft, the policy panel reiterated.
The broader economy continued to expand moderately the Fed reiterated, just a day before the advance estimate of second quarter GDP is expected to show a 2.5% expansion of output, a little above the post-recession trend.
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How to decode the FOMC minutes
A highlight on the economic calendar this week is the release of the July FOMC minutes on Wednesday.
The market is struggling to decide whether or not the Fed will hike rates in September and this report is one of the final opportunities to understand the Fed bias.
Bloomberg today has an excellent report on decoding the Fed minutes. A few key takeaways:
This is great stuff.
For me, the biggest peril in the FOMC is newswires over interpreting the headlines. The market doesn't move on the Minutes, it moves on the headlines. On many occasions, it takes hours or even days to rectify the difference.
read more
USD: FOMC Already Made Up Their Mind On Next Move - Barclays
On Wednesday, the minutes corresponding to the July 28-29 FOMC meeting are going to be released.
"We do not expect a material change and we anticipate that the document will echo the latest comments from different FOMC members. We think they will want to keep options open and will probably signal the data dependency of their decisions ahead. We believe that the FOMC has already made up their mind about their next move, absent any market disruptive events in the months ahead. Our base case remains a September Fed hike," Barclays argues.
"Furthermore, we argued that the actual path of the normalization process will be more important for FX markets. The pace at which the Fed could tighten monetary conditions should depend heavily on price measures," Barclays adds.
"We expect the USD to be supported in the next weeks mainly due to external factors. Fears around China and weak commodity prices should keep pushing investors out of risky assets, benefiting the USD under different scenarios," Barclays projects.
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Two things to watch for in the FOMC Minutes
BNP Paribas highlights two spots to watch in the Fed Minutes:
The minutes of the 29 July US Federal Open Market Committee (FOMC) meeting are likely to reveal mixed views on the exact timing of interest-rate 'lift-off' (September vs December), with the sticking point being "reasonable confidence" in inflation, says BNP Paribas.
"The key message will probably be that 'lift-off' is approaching and that we moved a step closer in July. A majority of FOMC participants probably still expected 'lift-off' to be appropriate sometime this year. As markets are already pricing this in, the minutes should present few surprises," BNPP adds.
"Two things to look for: (1) what "some" further labor-market improvement means and (2) why there was no progress report on being "reasonably confident" in the inflation outlook," BNPP argues.
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Fed's Bullard: Will argue for September liftoff
Comments from Bullard on MNI:
Bullard is a hawk so these comments shouldn't be a surprise. But the thing about Bullard is that if the S&P 500 fell 60 points between now and the September meeting, he'd be the first one to argue for keeping rates at zero.
He doesn't have a vote on the FOMC this year, for what it's worth.
What To Expect From FOMC Minutes? - Views From 15 Major Banks
The following are the expectations for today's FOMC minutes from the July 28-29 meeting as provided by the economists at 15 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.
Goldman: The FOMC Minutes from the July 28-29 meeting should provide some useful information to better assess the timing of the Fed’s 'lift-off' date. Our economists’ base case remains December.
Nomura: We do not expect the FOMC to use the minutes to send a clear signal about its near-term intentions. That said, the relative dearth of recent public comments from FOMC participants and the markets’ recent volatility suggest that the minutes will be scrutinized for any hints on how the Committee is assessing the critical issues. Here are the critical issues and what to look for in the minutes: 1- How does the Committee see the outlook for growth? How strong does growth have to be for the FOMC to start raising rates? 2- How is the Committee evaluating foreign developments and their impact on the US economy, and how is the Committee evaluating financial conditions? 3- How confident is the FOMC in its outlook for inflation? Inflation continues to run well below the FOMC’s 2% target and shows no sign of sustained acceleration. 4- How confident is the Committee in its judgment that “slack” has declined to the point that it should be increasing inflationary pressures? 5- What does the Committee expect to learn from incoming data? 6- Does the Committee feel it is ready, from an operational perspective, to raise rates? How concerned is it about year-end volatility? 7- How high is the bar for subsequent interest rate hikes?
Credit Suisse: The July FOMC statement lowered the bar for labor market improvement from needing to see “further improvement” to just “some further improvement” prior to liftoff. The minutes from the meeting should garner significant attention as markets gauge the likelihood of a September rate hike. Persistently low inflation continues to be a concern for the Fed given its dual mandate. We remain bullish on the USD, preferring longs against the commodity bloc (CAD, AUD, NZD) and vulnerable EM currencies (ZAR, TRY, MXN, BRL).
Morgan Stnaley: The FOMC minutes (Wed) will be in focus, especially since the pricing for a September hike has reduced recently so any adjustment back should be USD positive. The markets may be watching for any comment on USD strength; however, we note this is from a meeting prior to the PBoC’s moves last week.
Barclays: We do not expect a material change and we anticipate that the document will echo the latest comments from different FOMC members. We think they will want to keep options open and will probably signal the data dependency of their decisions ahead. We believe that the FOMC has already made up their mind about their next move, absent any market disruptive events in the months ahead. Our base case remains a September Fed hike.
BofA Merrill: There were relatively few changes to the FOMC statement in July relative to June, but on the labor market front the Committee shifted to highlighting the cumulative progress on reducing underutilization “since early this year.” This change was reflected in the policy language, which added the modifier that only “some further improvement” in labor market conditions would be needed for liftoff – a lesser standard that raised the market’s expectations for a September start to the hiking cycle at the time. Details about just what Fed officials still want to see on the labor market side – that is, how much improvement “some” is – would be notable...Finally, discussion of how the FOMC is evaluating the appropriate pace of rate hikes, and how they plan to communication that pace, would be noteworthy and get some market attention. Given events of late, markets are starting to price in an even flatter hiking cycle. Discussion at the July meeting could influence market views around the pace of rate hikes (and perhaps the terminal rate as well).
SocGen: We don’t really hold out too much hope that the FOMC minutes will magically clear the fog surrounding Fed policy and resolve the debate raging in the market. The majority of economists, strategists and commentators respond to surveys by saying they expect a rate hike in September or, failing that, later this year. Traders, salespeople, and investors, as well as Uncle Tom Cobley, are more circumspect after the repeated failure of the Fed to hike in recent years. Most likely, the minutes will be seen to support the view of the consensus amongst the commentators, but will fail to allay the fear of inaction amongst the traders/investors. And that would most likely leave markets still wracked by uncertainty, about the Fed, global growth and China. Too much to worry about to believe that risk aversion will melt away. So, it seems right to stay long USD and JPY, short Asian and commodity-sensitive currencies through the uncertainty.
Credit Agricole: When it comes to the FOMC minutes, we believe that they should support the view of the central bank considering higher rates in September. Our economists expect central bank members to note solid job gains, declining unemployment, and diminished labour market slack. Employment data released since the last meeting should be consistent with further improving conditions. Elsewhere, there should be a heightened focus on any debate regarding the inflation outlook, especially as falling inflation expectations have been regarded by market participants as a reason to question the Fed’s readiness to tighten monetary policy this year. Altogether we see limited risk of falling Fed monetary policy expectations in response to the minutes and that keeps us confident in being long the greenback.
RBS: Market participants are desperate for a similarly clear signal, in either direction, about the likelihood of a September 2015 rate hike and as Chair Yellen is not speaking at the Jackson Hole Symposium this year, the FOMC July meeting minutes should be heavily scrutinized in this regard. While our economist Michelle Girard thinks the Fed may disappoint on giving a “firm” signal, which would fit with their data dependent outlook, she sees a risk that the FOMC minutes begin to put a greater emphasis on the pace of hikes being gradual. A clear discussion along those lines may be a “soft signal” that an earlier start to rate hikes, giving more assurance that a gradual pace can be taken, is the preferred path of the FOMC’s majority...Because the meeting took place before China’s devaluation, that discussion should not come up in the FOMC July minutes.
BNPP: The FOMC minutes should show mixed views on the timing of lift-off but with a clear majority still expecting a move this year. Areas to monitor more closely are further details on what would make the Fed “reasonably confident” in the inflation outlook as well as an assessment of the impact from international developments. We think the risk-reward still favours being patiently bullish on the USD ahead of the likely return of better trading conditions in September.
HSBC: It will be important to see if any additional insight to when the first interest rate increase in the US for more than nine years will arrive. The proportion of FOMC members concerned about external events, given this meeting occurred before the recent volatility in China will also be of particular interest as will any discussion on the potential size, frequency or terminal point of the anticipated hiking cycle.
Commerzbank: In contrast to us (and most other analysts), the markets are still not convinced of a rate hike in September. Perhaps the minutes will finally make the market realise that the Fed’s baseline scenarioforesees a rate hike in September and that only massive downside surprises will keep the Fed from implementing its plans. Judging from the Fed’s signals up to now, however, inflation is unlikely to be the tipping factor.
SEB: The Minutes from the 28-29 July FOMC meeting may give some fresh indications concerning the probability of a September hike, which still is our main call. As it is our interpretation that the July employment report was consistent with the “some further improvement” that the Fed is looking for any suggestions in the minutes how “some” should be interpreted will be interesting. Furthermore, a possible discussion on the interest rate path and how to communicate it to the public could be interpreted as the Fed is gearing up for a hike in September. Finally, it will be interesting to see the officials views on China. Market reaction: Generally EUR/USD is more volatile than usual on days with Minutes, though the market reaction is usually very short lived as most of the change has occurred the first ten minutes. However, the day after there is continueation pattern.
Danske: We should find out more on the general thinking on inflation within the FOMC as the minutes from the July FOMC meeting are released later today. The FOMC added the word ‘some’ to the phrase ‘further improvement in the labour market’ in relation to what is needed to trigger a first rate hike. Our interpretation of this change is that labour market data would have to worsen for the Fed to take its finger off the trigger while a continuation of the recent trend would be enough for the Fed to pull. We continue to see the first Fed funds rate hike coming in September, but the risk is that it comes later.
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