What To Expect From FOMC Minutes? Market predictions and reactions - page 11
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Dollar droops as equities come under pressure before Fed meeting The dollar was mostly lower in Asia on Tuesday, taking its cue from a broad move lower in regional equities and caution ahead of the U.S. Federal Reserve's two-day meeting that begins later in the session.
MSCI's broadest index of Asia-Pacific shares outside Japan skidded 0.7 percent, as China's key share indexes gave up more than 1 percent.
Adding to the risk-off mood, the U.S. Navy sent a destroyer within 12 nautical miles of artificial islands built by China in the South China Sea, in a challenge to Beijing's territorial claims there.
"It looks like a traditional risk-off move, with Asian stock markets down," said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong, who added that safe-haven currencies like the yen were outperforming the risk-proxy currencies like the Australian dollar.
"The Aussie in particular is underperforming, so the U.S. dollar is stronger against the Aussie."
Frequently used as a China play because of Australia's significant trade with that country, the Aussie slipped about 0.1 percent to $0.7235, and also shed about 0.6 percent on the 87.23 yen.
The greenback began the Asian session already on the back foot, after disappointing U.S. home sales data pushed down Treasury yields and prompted investors to pare bets that the Fed would opt to hike interest rates before year-end.
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Quick FOMC previews from 20 banks
The Federal Reserve rate decision is due at 2 pm ET
The following are the expectations for today's FOMC October decision as provided by the economists at 20 major banks along with some thoughts on the USD into the event as provided by the FX strategists at these banks.
Goldman Sachs: We do not expect significant changes in the October FOMC statement. The statement is likely to acknowledge slower payroll gains while still describing growth as "moderate." We would view such an outcome as indicating that, despite the weaker-than-expected recent data, the leadership's baseline for liftoff remains December.
Morgan Stanley: The market appears to be expecting very little from this week's FOMC meeting. Our economists are also not expecting any change in the statement. But markets are likely to become more data sensitive in the run-up to the December meeting, where our economists still anticipate liftoff.
JP Morgan: We are expecting no change (which is virtually a unanimous market view), so the statement will be key. The extent to which the statement persuades the market that Dec is a real possibility will likely be the key driver of USD price action.
Deutsche Bank: DB's US economists expect the FOMC statement to be dovish one, with a more cautious tone relative to September, given the fact that the economy likely grew under 2% last quarter, and growth prospects for the current quarter are dimming in light of the sharp slowdown in the index of leading economic indicators. Moreover, the trajectory of consumer spending, the dominant driver of economic output, weakened intra-quarter (i.e., between July and September). The description of the labor market will surely have to to be toned down as well as the job market has meaningfully slowed over the past couple of months. The financial markets will treat the marking down of the Fed's near-term assessment of the economy as dovish, thereby further reducing the probability of a December 2015 rate hike. And if the Fed determines that it really wants to raise rates this year, the likely tightening in financial conditions that would accompany such a desire would give policymakers pause. Therefore, we do not expect a rate hike until the March 2016 meeting at the earliest
Barclays: We expect the FOMC to hold its monetary policy unchanged as we continue to look for an initial rate hike at the March 2016 meeting. Its statement will likely contain only minor adjustments and retain the language "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," in our view.
Credit Suisse: Our US economics team expects the Fed to mark to market its statement to take account of recent softness in US economic data. But they also expect the Fed to introduce a sentence that perhaps downplays the significance of the spillover from weaker global conditions in order to leave open some optionality for a December rate. hike. If the FOMC statement pans out as our economists expect, given that market pricing is at 36% for a December rate hike and that the first hike is not fully priced in until June 2016, the USD would see a net positive reaction in our view. Otherwise unless the Fed is dovish to the point of ruling out a December rate hike entirely, which would probably lead to USD losses of up to 2% against the majors over coming days, we would expect only limited USD movement. Under these circumstances, we would look to fade resulting USD weakness given our expectations for easing from the ECB and possibly other central banks in December.
BNPP: We expect Wednesday's FOMC statement to contain only modest dovish adjustments, with the Committee likely keen to leave open the possibility of delivering a hike in December if data improve. Given light long USD positioning as signalled by BNP Paribas positioning analysis, the USD should ride out the dovish adjustments relatively unscathed. Furthermore, monetary policy developments outside the US remain as important if not more important for near-term USD direction.
BofA Merrill: The October FOMC meeting is unlikely to deliver any major changes in policy or language, despite several Fed officials' recent attempts to characterize this meeting as "live". Without a forecast update or press conference scheduled, the focus will be on interpreting any revisions to the statement language. We expect relatively minor edits, however, and the interesting discussion won't appear until the minutes are released later in November. At this stage, we continue to see a relatively flat distribution for the timing of liftoff. December is our modal forecast for the first rate hike, but there is a significant chance that it could be later - depending on the upcoming data flow. No clear signals... once again "The FOMC has tried to dissuade markets from expecting any explicit signals about upcoming policy changes, emphasizing data dependence. As such, we anticipate no meaningful changes to the policy guidance language. That should not be read as a sign the Fed will not hike in December; rather that they are keeping all options open. We still see a significant chance that the FOMC will hike this year, but we likely will need to wait for subsequent speeches to get any clarity on the timing of liftoff.
Nomura: We don't expect the FOMC to change policy at today's meeting. At the moment, markets appear to assign about a one in three chance of "liftoff" in December. We do not think the FOMC will want to do anything at this point that reduces those odds. On the other hand, we do not think that the Committee is ready to send a strong signal that "liftoff" in December is likely. In the weeks after the October FOMC meeting we will get data that may help to clarify the outlook for the economy. Moreover, Yellen and other FOMC participants are scheduled to speak between the October and December meetings and therefore they will have the opportunity to clarify their intentions. Consequently, we do not think that the Committee is in a position to send a major signal about its policy intentions at this time.
RBS: RBS matches the consensus anticipating no change. With no press conference scheduled and no update to the Fed's projections for growth, inflation, or 'dots', the bar was already set fairly high for any change in policy. International developments and domestic data released since the September decision are unlikely to have increased the Fed's sense of "reasonable confidence" that inflation will rise over time. The fact that the FOMC will release only its post-decision FOMC statement this week severely limits the Fed's ability to communicate a change in policy outlook. In this sense, less news is good news for the USD - the fewer changes the FOMC makes, the more positive for the USD at the margin. But any USD gains inspired by an unchanged statement may prove fleeting, as participants quickly look to the commentary from FOMC officials and the minutes following the decision for a more detailed look at how the Fed's views on the outlook have evolved
Commerzbank: The Federal Open Market Committee (FOMC) members may have said time and again that they could hike rates at their October meeting, but the markets have not believed them. And with nobody expecting a rate hike today, we are won't see one. The Fed certainly will not want to wrong-foot the markets in the current environment. However, it will have to become more explicit in its communications if it wants to hike rates at any time in the future. Nevertheless, it is unlikely that it will clearly signal a rate hike in December today, as doing so would undermine its mantra of "data-dependency". The USD exchange rate will depend on what the Fed statement says on the recently weaker data. If the Fed believes that the US economy is still recovering nicely, the USD might trade somewhat firmer after the meeting, as the markets are currently overly cautious and predicting a rate hike only for March 2016. The Fed will certainly not sound even more pessimistic today. Rather, it might cautiously hint at approaching rate hikes. However, that will not be enough to justify EUR-USD to break out of its trading range of 1.08-1.15. The Fed's glass is only half full - note: "half".
SocGen: A policy move is really, really unlikely and I wouldn't hold out much hope of a shift in the policy statement to encourage pricing of a December hike (by, say, removing the reference to international developments in then assessments of risks). Can Fed dovishness calm global markets and stop the dollar's advance?. Oil price are one worry, and the precipitous fall in Bund yields another: 0.44% this morning. The Fed will have its work cut out tom prevent a slip in EUR/USD under 1.10 (towards 1.08) and that, in turn, will make the DXY chart look scary to technical analysts.
Credit Agricole: Today's key release is the October FOMC statement. Nevertheless, we think this will pass as non-event so markets more likely to focus on data releases. This reflects a general view that the chances of a rate hike this week are remote. What's more, there is no presser or forecast updates, leaving market participants to focus on the statement. This month's statement is unlikely to provide much clarity about the outlook for the FOMC policy rate so markets are left clinging to data releases for signals about the state of the economy. Despite the limited clarity on the Fed outlook, our focus persists on the strength of the domestic economy. As such we stay of the view that the central bank is likely to tighten monetary policy in December. As consensus expectations seem to favour a March lift-off such an outcome suggests room of rising Fed rate expectations to the benefit of the USD.
BTMU: The release of the latest FOMC policy statement will be scrutinized closely to see if it is consistent with market expectations which have pushed back the timing of the first Fed rate hike into next year. The statement is likely to acknowledge that economic and labour market growth has moderated recently which may satisfy market expectations looking for the Fed to delay raising rates. However, it remains unlikely that the Fed will explicitly rule out beginning to raise rates this year leaving the decision data dependent in the coming months. The US dollar may weaken modestly following the release of the statement but it is unlikely to derail its renewed upward momentum. The Fed still appears relatively hawkish when overseas central banks are increasingly shifting to ease monetary policy. The US dollar's recent rebound is unlikely to overly concern the Fed either as financial conditions have eased significantly since their last meeting in September.
CIBC: Our call for a December rate hike. But given a very divided Fed, expect the October meeting's statement to be very wishy-washy in terms of anything that might signal the timing of their lift-off.
SEB: -Unchanged Fed policy and few/no new signals tonight. Fed has signaled its willingness to raise rates for a long time now and there was scope to deliver during the summer. However, the signal of tighter monetary policy one year ago: 1) strengthened USD, 2) pressured the oil price and 3) created the basis for a (commodity driven) EM crisis. The dependence on the USD that Fed has signaled is surprising. That China is slowing down is not as surprising. The US economy is chugging along, but the pace is not convincing and inflation expectations are still under pressure. To make matters worse, the ECB has made life more difficult for the Fed.
UOB: Given that any expectations of an interest rate move have now evaporated and that there is no press conference scheduled after the event, there is a great deal hanging on the accompanying statement, which we think will likely be more downbeat than that issued in September in light of recent activity and inflation data, but not sufficiently so to rule out the possibility that the Fed could still begin tightening at the Dec meeting (our view).
Danske: The FOMC meeting this week is unlikely to provide us with much new information. We expect to receive a statement but no updated projections or press conference. Along with consensus, we expect no change in policy at the meeting. We believe the Fed wants to keep all doors open at this point and will try to signal that a December rate hike is an option but by no means given. If markets keep still after the statement, we think the Fed can declare its mission accomplished. The tone on recent economic developments is likely to be more downbeat than in September but global economic and financial developments should have become less of a risk. In our view, the forward-looking part of the statement is likely to be kept broadly unchanged, as the Fed awaits more data before changing its view on the outlook.
TD: Without updated economic projections and an accompanying press conference, the bar for action at the October FOMC meeting is much higher than in September and December. Only if the economic data had improved materially versus the Fed's updated expectation outlined in September would a hike this week be warranted. Instead, the exact opposite scenario has unfolded.
Westpac: There is an almost nil probability of a rate hike occurring at the October meeting, with the December meeting instead the focus. Expect the October statement to carry a very similar tone to that of September, with the FOMC eagerly awaiting the release of Q3 GDP (the day after the meeting) as well as further updates on jobs and inflation.
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FOMC Minutes Preview: Pace Of Tightening - Nomura The minutes to the 27-28 October FOMC meeting will be interesting to see how much consensus on the economic outlook and monetary policy was reached at the October meeting, notes Nomura.
"Additionally, we will be reading the minutes for color on the economic outlook, the reasoning behind the change in forward guidance, discussions around the pace of tightening and balance sheet normalization.
...We will look to see if there is a consensus forming around this reaction function or if there will be other criteria used for the pace of tightening," Nomura adds.
FOMC Minutes: Officials were "leaving options open" for Dec meeting Highlights of the FOMC minutes released Nov 18:
A quick look at the headlines doesn't tell us much we don't already know. If anything, there isn't the hawkish hint that USD bulls were hoping for. There is no reason to buy the US dollar after the Minutes, we already know that Dec was in play.
FOMC Minutes: A Divided Committee? - Barclays Barclays Capital views the minutes of the October FOMC meeting as reflecting a much less certain committee than the hawkish October statement conveyed.
"Members seemed to have differing levels of confidence over the likelihood of inflation returning to target, although as a whole the committee believes that with appropriate policy, inflation will gradually return to 2%. Members also seemed uncertain over the state of labor markets. Many expressed concerns about the likely evolution of labor markets, and some noted that the weak job reports in August and September posed downside risk to the outlook. Of course, the October jobs report seems to have allayed many of these concerns, leaving the committee primed for a December rate hike," Barclays adds.
"The minutes suggest that the committee remains divided. However, since the time of the October meeting, we see them as having reached a broad consensus on a December rate hike.
We believe that divisions within the committee and the soft path of inflation we expect early next year will lead to a lower policy path in 2016 than the committee expects; we forecast it will hike only three times in 2016," Barclays argues.
EUR/USD Drivers & Targets: Beyond Policy Divergence - Morgan Stanley The focus on relative policy has intensified a the FOMC minutes confirm the Fed’s intention to convey the potential for a December lift-off, while ECB statements continue to point to the reassessment of policy in December with the likelihood of further easing measures, notes Morgan Stanley.
"Our FX Drivers model also shows an increased sensitivity of currency markets to policy generally, as well as some specific cases.
…but other factors matter. EUR/USD stands out as driven by policy, with the ECB-Fed divergence pointing lower for the pair," MS argues.
"However, we suggest other factors – the global risk environment and commodity market performance – also need to be taken into account to identify specific opportunities and risks in FX markets. This is even the case for EUR/USD. A more challenging risk environment and increased asset market volatility could limit EUR/USD downside," MS adds.
"Even a EUR/USD rebound is possible in a market risk-off event given the EUR’s inverse relationship to asset markets. We are cautiously bearish EUR/USD as our targets are approached," MS advises.
MS targets EUR/USD at 1.06 by year-end and at 1.03 by Q1'16.
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Here Are The 4 Steps The Fed Will Take For December Liftoff - BofA Merrill With market pricing assigning high odds to a rate hike in December, we shift discussion to how the Fed will lift off as opposed to when. When they increase rates, we expect the Fed to: (1) raise the interest rate on excess reserves (IOER) to 50bp, (2) move the overnight reverse repo (ON RRP) rate to 25bp, (3) provide details on if or how they expect to use term tools in the normalization process, and (4) continue reinvesting proceeds from their Treasury and agency debt and MBS holdings. Table 1describes each of the tools the Fed could use and provides a bit of background information on them.
Short-term money market rates should shift higher in response to the first rate hike though there will likely be a fair amount of variation amongst them (Chart of the Day).
We expect that the fed funds effective and Treasury general collateral repo rates will trade in the lower half of the IOER to ON RRP band. Short-dated bills and agency discount notes will trade near or below the ON RRP level while three-month LIBOR will likely settle at or slightly above the IOER rate. Given the Fed has not raised interest rates since 2006, there is a fair amount of uncertainty around these forecasts and it may take money markets some time to settle into their new trading levels. Year-end liquidity dynamics may also add volatility to the front end after the first Fed move.