RESEARCH ROUNDUP: FOMC’s Dots to Fall, Point to 1 Hike by Yr-End
(Bloomberg) -- (Adds BNP, RBC, RBS to item that moved on Sept. 19.)
- FOMC seen as keeping rates unchanged on Sept. 21 for 6th straight meeting and suggesting one rate increase by year- end, with median dots through 2018 expected to drop, based on published research from economists and strategists.
- Most expect a December move, with Barclays and BNP holding out for a hike this week
- Market-implied probabilities stand at ~22% and ~30% for FOMC’s September and November meetings and above 55% for December; fed funds futures not fully pricing next rate increase until mid-2017
- Barclays (Michael Gapen, Rob Martin, Blerina Uruci)
- Fed to hike this week, yet it’s “close call;” case for action isn’t “iron clad”
- Worries about inflation, unwillingness to “buck” mkt pricing could lead FOMC to pause in favor of a “strong” signal of hike by yr-end
- Outlook has evolved in way that “clears” FOMC’s threshold for action
- FOMC will have to ignore mkt pricing no matter when it moves
- MORE
- BNP (economists led by Paul Mortimer-Lee)
- Fed to hike by 25bps this week, with decision a “close call”
- Lower long-run dot and indications of no more hikes this year “could soften the blow”
- If Fed doesn’t hike, it will likely try to convey a “hawkish pause,” with upgraded economic assessment and conclusions that risks are “almost balanced”
- MORE
- BofAML (Michelle Meyer, Ian Gordon, Mark Cabana)
- Fed to skip rate increase this week and give “cautiously upbeat assessment,” which should lead to modestly higher front-end/real rates and mildly support USD
- Yellen likely to make case for hike by yr-end during press conference, with emphasis on need to see continued data improvement
- Median dot will move down to 0.625% from 0.875% in June; BofAML still expects 3 hikes in 2017 and 2018, bringing median forecasts to 1.375% and 2.125% respectively
- MORE
- Citi (Jabaz Mathai, Steve Kang, Jason Williams)
- Expectations for a rate hike “extinguished effectively” by Fed Gov. Lael Brainard in recent speech; FOMC will pass on rate action this wk
- Outright long position in FFV6 is a trade that can be justified; second trade is to pair long FFV6 with short FFF7
- Deutsche Bank (researchers/economists led by Dominic Konstam and Joseph LaVorgna)
- Statement may be “relatively hawkish,” despite rates remaining unchanged, if policy makers are determined to act by yr-end
- Only minor adjustments seen to estimates for GDP, employment and inflation; shallower projected path for fed funds rate would be consistent with recent Fed commentary
- Fed’s “hawkish hold” for September, along with potential for BOJ move on short rates and shift in QE, might be consistent with a steeper curve
- JPMorgan (Mika Inkinen, Antoine Gaveau)
- “Little reason” to change view that FOMC will remain on hold in September, hike in December
- Modest changes seen in statement to reflect that risks to outlook have diminished or are nearly balanced
- “Would not be surprised” to see at least one FOMC member expecting no hikes this yr, given Brainard’s recent remarks; more than 4 members expecting no hike “would pose some risks to our December call”
- RBC (Tom Porcelli, Jacob Oubina)
- FOMC may not be able to say near-term risks have diminished
- Recent data calls into questions veracity of 2H rebound in economic growth and momentum in wage/price inflation
- Risks of some near-term slowing are “non-trivial”
- MORE
- RBS (strategists led by John Briggs)
- FOMC will leave December in play via dot plot, with “little risk” to U.S. bond market
- Investors should buy UST 7Y “on a knee-jerk bearish move” in reaction to either BOJ or FOMC outcomes
- MORE
- Renaissance Macro Research (Neil Dutta)
- BOJ’s Sept. 21 policy decision is “source of uncertainty” for Fed; main issue is extent to which BOJ is willing to commit to its 2% inflation objective
- BOJ “disappointment” and balanced Fed risk assessment would likely lead to “significant flight to quality” across global asset mkts
- FOMC “highly unlikely” to hike on Wed., though likely to move once by yr-end; little to warrant “meaningful” reassessment of current economic conditions in 1st paragraph of statement
- UBS (Drew Matus, Samuel Coffin, Dave Liang)
- FOMC to keep rates unchanged and reduce number of 2016 hikes in dots to just 1, mitigating impact of a hawkish statement; should also point to move in December
- Projected path of rates in 2017 and 2018 should move lower, to 1.375% and 2.125% respectively; UBS still expects 2 more hikes in 2017
- MORE
- Wrightson ICAP (Lou Crandall)
- Fed’s window of opportunity to hike is already closed
- Ambiguity in near-term direction of data makes this a “ticklish” time to announce a hike
- Will be hard for FOMC to be “overly hawkish” since statement will need to explain why policy makers aren’t hiking this month
- Statement could be “neutral,” with Yellen delivering “close but not quite there yet” message
- MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Antoine Gaveau (JPMorgan Chase & Co)
Blerina Uruci (Barclays PLC)
David Liang (UBS Securities LLC)
Dominic Konstam (Deutsche Bank AG)
Drew Matus (UBS Asset Management Japan Ltd)
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