What To Expect From FOMC Minutes? Market predictions and reactions - page 13
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Fed Cheat Sheet – Quick guide to all moving parts All eyes are on the Fed and its historic rate decision. The greenback made a short comeback towards the event. We guide you through the moving parts of the events: the statement, the dot plot, Fed forecasts and the Yellen show, describing potential scenarios and what to look for. Remember to trade with care on this huge event. Here is the video preview:
Trading The FOMC: Views & Strategies From Major Banks Most currencies were broadly range-bound ahead of today’s FOMC monetary policy announcement in which the Fed is widely expected to lift the federal funds rate for the first time in nearly a decade. The following is a round-up of of the views and strategies on trading the USD going into the event.
Barclays: USD: Finally...Ready For Departure (see here for full story).
The expected path of the hiking cycle will ultimately determine USD price action, not the first increase, which is already widely anticipated. Although we think that the USD should outperform in the medium term, we would not position for Wednesday’s meeting. We believe that the Fed will be cautious about committing to future hikes and will instead try to leave its options open, possibly signaling that although it would like to hike each quarter in which it has a press conference, uncertainty in the global outlook warrants a data-dependent approach. Barclays anticipates one hike during 2015 and three more (25bp each) in 2016.
If we are correct, the USD could underperform EM currencies as “buy the rumor, sell the fact” price actions occur, but we would not depend on strength in emerging markets, as they continue to face significant headwinds. Risks of further deceleration in China linger, and the continued drop in oil prices and political events are also hurting already-battered confidence in EM.
Morgan Stanley: Trading The Fed (see here for full story)
We think risks are skewed to a less dovish outcome, as there is no guarantee the dots will come down and the Fed’s data-dependent approach may dominate the message of gradualism.
Thus we like the risk/reward of being long USD into the meeting.
Of course, it matters what you go long USD against. We think the combination of weak commodities, stress in high yield and uncertainty about China’s FX policy may lead funding currencies to outperform.
The deterioration in risk sentiment is supporting our bullish JPY call, and EUR’s negative correlation to risky assets is strong, especially given the disappointing ECB announcement earlier this month.
Should the Fed’s messaging fail or broader macro concerns weigh on risky assets, USD is actually vulnerable against EUR, JPY and other non-commodity G10 currencies.
Therefore we prefer to play USD longs against AUD and CAD in G10 and select EM currencies such as TRY and BRL.
Credit Suisse: USD Into FOMC: A 'Different World' (see here for full story)
Credit Suisse US Economics team is forecasting a 25bp hike, but for the committee to convey a dovish tone in its guidance about the future path of policy.
This view is widely held by the market – with 99 of 102 economists on Bloomberg forecasting a hike and the front-end rates market pricing a roughly 80% probability of such a move (assuming Fed Funds settles in the middle of its range),
What does this mean for the FX space? "We retain a USD-bullish view given the fact that so little has been priced in for the Fed's hiking cycle. We think this Fed hiking cycle will be different from those in decades past where the “liftoff” marked an end to broader USD strength. Instead, we see some key differences in the current macro backdrop that suggest broad-based USD strength can continue.
Deutsche Bank: USD: Trading The FOMC Dots (see here for full story)
The Fed will maintain maximum ‘optionality’ to hike rates in coming meetings, making it clear that coming meetings are ‘live’, but the hiking path will be ‘gradual’, ’data dependent’ and less predictable than the last tightening cycle, says Deutsche Bank.
The most revealing part of the Q&A may revolve around Yellen’s comments on whether the Fed will put more weight on inflation/inflation expectations now that the Fed has finally got off ‘zero’.
The FOMC dots, particularly for the end of 2016, will play an inordinate role in how the market initially responds to the FOMC headlines. There is market talk of some small (25bp) trimming in prospective rate hikes, with the median dot shifting to three rather than the four hikes in 2016.
IF the 2016 median dots do come down by 25bps, the USD is apt to immediately slip. In contrast, even if the 2018, and longer-run median dot comes down by 25bps as seems likely, if the 2016 dots don’t come down this will limit the Fed’s ability to convey this first hike as ‘a dovish hike’ and the USD ‘headline’ response will be positive. The economic outlook has not changed much so there is a real danger the 2016 dots are not as dovish as the market hopes.
Nonetheless a post-meeting holiday season positive risk ‘relief trade’ is eventually likely, on a view that a first hike in 9 years went off without too much market turmoil, and that another Fed hike is unlikely before March.
Goldman Sachs: USD Into FOMC: 'Hike It And Like It' (see here for full story)
The best approach, in our opinion, is to “hike and like,” which is close to our US team’s forecast that “gradual” does not make it into the statement and the 2016 median dot is unchanged, admittedly a close call.The market will take such a message as growth positive (the US economy is strong enough to support a series of hikes) and will be relieved not to have to worry over the Fed’s reaction function. Risk will bounce, so that financial conditions – even with USD up versus G10 – could ease. Should the Dollar rally too much, there is a built-in circuit breaker: Dollar strength is a deflationary impulse that will slow the pace of Fed hikes down the road.
Better to now “hike and like” and rely on this transmission channel, rather than unsettle markets with an implicit focus on financial conditions, causing a “risk-off” with renewed worries over the Fed’s reaction function.
In our base case – the “hike and like” scenario – the Dollar could rally between one and two percent against the majors, while equity markets should also rally.In contrast, a cautious message could rattle markets, causing EM to weaken and risk to sell off.
SocGen: Take-Off Or Put-On Positions Into FOMC? (see here for full story)
As the FOMC meeting gets underway, market direction is much more a function of positions being taken off, rather than new ones being put on...
As for markets in the coming days, the rest of us take our cue from Treasuries. Insouciance reigns at the moment, but can it persist? If 10s stay close to today’s levels, we don’t see much of a move in USD/JPY or EUR/USD. But we do think that in the long run, there is enough momentum, in the US economy for yields to edge higher and that will drag the Euro lower.
NAB: Sell AUD/USD On Any Post-FOMC Extension Above 0.73 (see here for full story)
On the trade watch-list of National Australia Bank (NAB) a recommendation for selling AUD/USD above 0.73 looking for return to sub-0.70. We look to take advantage of any post-FOMC extension of the recent rally to re-set strategic AUD/USD shorts.
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FOMC: 'One And Done' Or 'Two And Through' - BofA Merrill The Federal Reserve took the first step at normalizing policy, hiking the Fed Funds rate to a range of 25-50bp. The Fed underscored a gradual pace of hikes but the median dot for 2016 was unrevised, maintaining 4 hikes for the year.
The focus now turns to the Fed’s next move. There are still some market participants in the “one and done” or “two and through” camps.
The Fed is trying hard to communicate otherwise, stressing that they are engaging in a hiking cycle, albeit historically slow. The Fed will be data dependent, hiking more quickly if inflation accelerates and vice versa if the economy weakens. But forecasting the Fed is not just about following the data, it is necessary to understand the Fed’s reaction function.
A key communication tool is the concept of an equilibrium real Fed funds rate, otherwise known as R*.
While short-run R* is close to zero, the long-run is still believed to be about 1.5% in real terms, suggesting a shallow and slow hiking cycle.
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Why The Fed Will Never Succeed The Fed will never succeed in its attempt to manage inflation and unemployment by varying interest rates.
This is because it and its economists do not accept the relationship between, on one side, the money it creates and the bank credit its commercial banks issue out of thin air, and on the other the disruption unsound money causes in the economy. This has been going on since the Fed was created, which makes the question as to whether the Fed was right to raise interest rates recently irrelevant.
Furthermore, it's not just the American people who are affected by the Fed's monetary management, because the Fed's actions affect nearly everyone on the planet. The Fed does not even admit to having this wider responsibility, except to the extent that it might have an impact on the US economy.
That the Fed thinks it is only responsible to the American people for its actions when they affect all nations is an abrogation of its duty as issuer of the reserve currency to the rest of the world, and it is therefore not surprising that the new kids on the block, such as China, Russia and their Asian friends, are laying plans to gain independence from the dollar-dominated system. The absence of comment from other central banks in the advanced nations on this important subject should also worry us, because they appear to be acting as mute supporters for the Fed's group-think.
This is the context in which we need to clarify the effects of the Fed's monetary policy. The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all? Before we can answer this question, we have to understand the relationship between credit and the business cycle.
There are two types of economic activity, one that correctly anticipates consumer demand and is successful, and one that fails to do so. In free markets the failures are closed down quickly, and the scarce economic resources tied up in them are redeployed towards more successful activities. A sound-money economy quickly eliminates business errors, so this self-cleansing action ensures there is no build-up of malinvestments and the associated debt that goes with it.
When there is stimulus from monetary inflation, it is inevitable that the strict discipline of genuine profitability that should guide all commercial enterprises takes a back seat. Easy money and interest rates lowered to stimulate demand distort perceptions of risk, over-values financial assets, and encourages businesses to take on projects that are not genuinely profitable. Furthermore, the owners of failing businesses find it possible to run up more debts, rather than face commercial reality. The result is a growing accumulation of malinvestments whose liquidation is deferred into the future.
Besides the disruption to healthy business development, monetary inflation also transfers wealth from the owners of the existing money stock into the hands of the initial beneficiaries of extra money and credit. The transfer of wealth is predominantly from savers and wage earners in the non-financial part of the economy, reducing their ability to spend. The beneficiaries of this wealth transfer are the banks and their favoured borrowers, for whom the credit has been created. How it is that destroying widespread ownership of wealth is meant to provide meaningful, lasting improvement to an economy is a mystery never properly explained.
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British Pound And 2016's Defining Issues 2016 will be a defining year for the British pound -- a year when politics will overshadow economics. Considering that sterling ended the year near 7-month lows against the U.S. dollar, some of our readers may find it surprising that the U.K. was one of the best-performing G10 economies. However according to the latest figures for the third quarter, the U.K. economy grew at an annualized pace of 2.1%, which matches the pace of U.S. growth. In contrast, the Eurozone and Japan grew 1.6%, Australia expanded 2.5% and Canada contracted by 0.2%. There's also very little debate that the Bank of England will be the next major central bank to raise interest rates. Yet sterling benefited from none of this and instead weakened versus the euro, Japanese yen, U.S. and New Zealand dollars over the past 6 months. Part of the underperformance was driven by U.S. dollar strength but slow U.K. wage growth, mixed data and cautious policymakers has the market looking for rates to rise in 2017 and not 2016.
We believe the market is underestimating the Bank of England and the U.K. economy because 2016 should be a year of strong growth. Consumer spending is the backbone of the economy and sales surged in November. While wage growth slowed, labor force participation rates remain near their highest levels in 20 years and service-sector activity is accelerating according to the latest reports. As the labor market tightens and inflation bottoms out, wages should rise as well. Slow Chinese and Eurozone growth poses a risk to the economy and the manufacturing sector but the U.K. is still expected to be one of the fastest growing G10 economies in 2016.
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Week Ahead: How Many FOMC Minutes Until The NFP? - BofA Merrill Following the first Fed rate hike in nearly a decade, market attention will turn to the December minutes to divine the timing of the second one – and, more generally, the pace of hikes. Discussion in the minutes is likely to be supportive of liftoff – and in that sense somewhat hawkish – but overall consistent with an expected gradual hiking cycle, at least initially. The market still sees a much lower end-2016 funds rate target than the FOMC, and thus will be looking for clues to what factors determine “gradual.”
The minutes likely will show that the key to subsequent hikes will be confidence in the outlook, especially for inflation. In her press conference, Chair Yellen suggested the Committee does not need to see higher actual inflation for a second hike. What indicators would give the majority of the FOMC confidence that inflation was returning to target thus will receive particular attention. Notable will be views over the degree of remaining labor market slack and the stability of inflation expectations. Concerns about global risks or financial conditions also would garner market attention. Given the detailed discussion of the neutral rate of interest (r*) in the October minutes, we expect a briefer mention in December.
With the focus of this meeting on liftoff and the corresponding implementation details, we expect a limited discussion of the balance sheet as well, with no decisions reached. More interesting would be any debate about the risks of a premature rate hike, and discussion of what tools the Fed might consider if it were necessary to reverse course and ease policy in the not-to-distant future. Along these lines, the dispersion of views concerning the outlook and future policy actions will be noteworthy, as market participants may attempt to infer the strength of support for further hikes – and the likely pace. While December’s decision was unanimous, the minutes could give hints about points of disagreement that might lead to either hawkish or dovish dissents in 2016.
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Preview: FOMC Minutes - RBC When it comes to the Fed the focus has shifted to the pace of rate hikes. Some officials (Yellen included) have noted that the Fed “dots” (in the Summary of Economic Projections) are the best guide for gauging the anticipated path of tightening.This pace was not altered in the December SEP, and thus still implies the Fed’s base case is for four hikes in 2016 – or 25bps at every other meeting.
As a result, the minutes may reveal this to be the “consensus” outlook amongst what is likely to be a wide range of views on the FOMC, while the market is still priced for a much shallower path (~2 hikes in 2016).
Note that the Fed gets to their “dots” projections with a very modest outlook on both jobs and inflation. Their 4.7% u-rate implies just over 100K in payroll growth and their 1.6% inflation call is hardly heroic. What this means is that the market is priced for (wrongly, in our humble opinion) a much more bearish economic outcome.
FOMC Minutes: Almost all officials agreed liftoff conditions met in Dec Highlights of the FOMC Minutes released January 6, 2015:
The US dollar is lower on the kneejerk as the market sees it as dovish.
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FOMC Minutes: 'Gradual And Vague': What's Next? - BNPP What stood out to us in the minutes of the FOMC’s 16 December meeting were the discussions of low inflation and the fact that “many” participants were more uncertain about the inflation outlook and/or saw “important” downside risks to their forecasts.
The bulk of the discussion on the pace of rate hikes was focused on explaining why participants think “gradual” adjustments will be appropriate. There was almost no discussion (with the exception of the “dots” included in the appendix) of what “gradual” actually means to the FOMC.
The minutes revealed that for “some members,” the decision to raise the target range in December was a close call, particularly given the uncertainty about inflation dynamics. We were not surprised by this. By our metrics, “some” means three to five participants. We can easily account for three of these participants – Chicago Fed President Evans and Fed Governors Tarullo and Brainard. All three were voters in December.
What next?
We continue to see high odds of a March hike, in the neighborhood of 80%. Inflation data released leading up to the March meeting are unlikely to increase worries and/or uncertainties about inflation returning to target. These concerns could even recede a little if core inflation evolves in line with our forecast. Base effects from energy prices should start to lift annual rates of headline inflation more notably starting in January, which, in addition to continued improvement in wage growth, should also bring some mild reassurance to policymakers.
BNP Paribas Fed call:
We expect 3 rate hikes in 2016, with a pause likely in Q4. We see high odds (roughly 80%) of another rate hike at the March FOMC meeting.
Fed Watch: Whose Dot Is It Anyway? - BofA Merrill
Each new year brings a shift in the voters at the FOMC. This year, the composition is set to tilt slightly hawkish:Evans will be replaced by less-dovish Rosengren, while Lacker, the lone 2015 hawk, will be swapped for three hawks: George, Bullard and Mester.
New faces around the table include non-voters Kashkari (Minneapolis), Kaplan (Dallas) and Harker (Philadelphia) as well as potential Governors Landon and Dominguez (the latter have yet to be confirmed). The last FOMC meeting showed 10 out of 17 members looking for either 3 or 4 hikes in 2016, consistent with our view. Chart 5 shows our best guess for how the latest dot plot for 2016 hikes lines up with the new panel of FOMC members.
There is a lot of uncertainty in “assigning” these dots, particularly for newer members who have not yet expressed their monetary policy views. For these members, our assumption is essentially a guess. A few notes: Governors Landon and Dominguez did not submit dots, while the Minneapolis Fed dot was submitted by the first vice president, not Kashkari (explaining the slightly dovish tilt). The big question is how many hikes Chair Yellen sees in 2016. We think Yellen is for 3 hikes, she may also be in the 4 hike camp.
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