Halister News

(Bloomberg) -- (Corrects 5th bullet to leverage ratio calculation.)

• Fed balance-sheet runoff will likely result in tighter funding conditions -- higher unsecured and secured rates and bill yields -- as reserves and RRP balances shrink on the liability side, Credit Suisse strategists led by Praveen Korapaty say in Sept. 19 note. 
• Decline in reserves “picks up pace” around 2Q 2018 and may be helped along by a resolution of the debt ceiling impasse; this should result in wider cross-currency bases, as well as higher secured funding rates since increased T-bill supply is a product of SOMA runoff
• It’s also possible government money market funds start to lose assets under management once reserves “hit levels where banks are forced to compete for deposits, though that’s probably further into the future”
• Runoff could potentially affect the way banks manage their high quality liquid asset (HQLA) portfolios; drop in excess reserves below ~$500b-$700b may cause fed funds or O/N repo to trade above IOER on a consistent basis
• More immediate problem for banking sector is if their balance sheets start shrinking alongside the Fed’s; if retail deposits dwindle then bank liquidity coverage ratios (LCR) would deteriorate
• Factors that may impact short-term rates beyond balance-sheet shrinkage include change in the leverage ratio calculation
• On asset side, Credit Suisse estimates ~50bp increase in 10Y term premia over the course of the entire unwind, assuming $3t “final” balance sheet size and 40% of QE unwound; only 15-20bp repricing by end-2018
• Other factors that may push UST yields higher include larger deficits, potential new fiscal measures like tax cuts and ECB taper

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang

--AARON KIRCHFELD

(Bloomberg) -- 3M Company shares fell as much as 1.7%, the most intraday since July 25, after they were downgraded to underweight from neutral at JPMorgan. The company’s years-long multiple expansion does not coincide with a dimmer outlook for the auto, electronic and broader China markets, analyst Stephen Tusa writes in a note.

• Says ~30% of co.’s growth this year stemmed from auto, electronics and China, but anticipates slowing next year
• Notes that driving growth is becoming more costly
• Near high-end historical multiple negatively skews risk
• Triggers for potential (~6%) downside to PT include:
  • Negative consensus revisions
  • Persistent tepid U.S. price performance
• Acknowledges portfolio quality, but says bullet-proof earnings are a "stretch"
• PT $201 vs $185 (July 25, Bloomberg data)
• NOTE: MMM 6 buys, 9 holds, 2 sells, avg PT $207: Bloomberg data

To contact the reporter on this story: Kristy Westgard in New York at kwestgard1@bloomberg.net To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net Sebastian Silva

(Bloomberg) -- U.S.’s Financial Crimes Enforcement Network says it issues advisory to alert financial institutions of widespread public corruption in Venezuela.

• FinCEN also warning against the methods Venezuelan senior political figures, their associates may use to move, hide proceeds of their corruption
• NOTE: Sept. 19, Menendez, Rubio Seek Clarification on Rosneft-Venezuela Deal
• NOTE: Aug. 25, Trump Targets New Venezuela Debt in Fresh Round of Sanctions (2)

To contact the reporter on this story: Katherine Tam in New York at ktam1@bloomberg.net

(Bloomberg) -- FOMC’s rate projections are seen as drawing more attention than any balance-sheet announcement Wednesday, based on published research by analysts; tapering of Fed’s $4.47t portfolio is seen as a given, with rates expected to remain unchanged for now.   

• RBC sees potential for 2020 median dot to show Fed’s tightening cycle is coming to an end; FTN, Morgan Stanley say long-run dot could fall to 2.75% from 3%
• NOTE: Traders have boosted the odds of a hike by December to ~50%; MBS analysts retain recommendations amid expectations that Fed will announce balance-sheet unwind today

BofA (Michelle Meyer, others)

• Any shift lower in 2019 or longer-run dots would support a steeper curve, given potential for a more patient Fed to allow for a shift upward in inflation
• Real question is when the Fed will hike again and whether it will continue raising rates over next two years
• MORE

Credit Suisse (Shahab Jalinoos, others)  

• FOMC could upend “broad USD negative view”  
• Three possible scenarios seen for a USD-positive surprise; one is the Fed makes clear through dot plot that another 2017 hike is highly probable, possibly as soon as November
• MORE

ING (Viraj Patel)

• Fed’s dot plot will likely reflect a reduced conviction on the pace and extent of future tightening
• More policy makers are likely to predict no more hikes this year, while 2018 and longer-run dots may move lower
• USD will resume weakening after FOMC meeting
• MORE

Morgan Stanley (Matthew Hornbach, others)  

• Lower median long-run dot is the biggest risk to call by Morgan Stanley economists for status quo; dot could fall to 2.75% from 3%  
• Next biggest risk is a lower median 2018 dot, which could fall to 1.875% from 2.125%, followed by possibility that Yellen takes a “more dismissive line” toward downside surprises in inflation data 
• Balance-sheet normalization should attract the least amount of attention
• Investors should enter tactical UST 2s30s flatteners, given risks to outcome of FOMC meeting

Allianz Global Investors (Franck Dixmier)  

• Fed will probably adopt a slightly less dovish tone than markets are expecting; this should enable policy makers to adjust forward guidance to pave way for a December rate increase
• Strength of U.S. economy and the state of jobs market make a future acceleration in inflation more likely, which would justify a “pre-emptive” hike

Bloomberg Intelligence (Carl Riccadonna, Yelena Shulyatyeva)  

• Meeting will mark a “watershed moment in the era of unconventional monetary policy”
• Reduction in Fed’s asset holdings runs risk of “unforeseen market consequences”
• In order to provide a buffer, Fed officials will likely signal a slower pace of interest-rate increases, although they’ll probably stand by their intent to hike again before year-end
• MORE

FTN (Chris Low)  

• Long-run dot could drop to 2.75% from 3% if just two participants shift expectations a quarter-point lower
• More likely that the 2017 dot will stay the same and the 2018, 2019 and long-run dots will shift
• Combined message of Fed’s summary of economic projections and Yellen’s press conference will tilt dovish

JPM (Michael Feroli)

• Dots will be “most-watched development” of meeting
• While more FOMC participants may expect no more hikes this year relative to June forecasts, it won’t be enough to bring down median dot
• Fed will continue to be at odds with current market pricing for 2018-2019 outlook; see MORE
• In separate note, strategists led by Matthew Jozoff said a JPM survey of MBS investors found they have a “nonchalant attitude” toward Fed’s tapering

Market Securities (Christophe Barraud)  

• Statement and shift lower in inflation projections for 2017 could send a dovish signal  
• Third rate increase this year is likely to still be reflected in dot plot; however, Yellen will probably be cautious in her press conference about the prospect of another hike in 2017
• Inflation assessment is likely to be downgraded again, given recent weakness wasn’t due to just transitory factors

Pictet Wealth Management (Thomas Costerg)  

• Fed will probably hike by quarter-point in December and again in March; “beyond that, the outlook gets muddier”
• “The Fed’s dots are too optimistic, especially beyond 2018”
• Some policy makers will probably reduce their expectations for terminal rate of this tightening cycle; median dot for terminal rate could drop to 2.75%

RBC (Tom Porcelli, Jacob Oubina, Michael Cloherty)  

• Release of 2020 dot for first time raises question of whether policy makers will show tightening cycle coming to an end
• Cycle could effectively end with fed funds rate at 2.9% in 2019 or 3% in 2020; alternatively, policy makers might show hikes beyond 3% neutral rate in 2020  
• MORE

Wrightson ICAP (Lou Crandall)

• Big question is how Fed will frame debate about possible hike in December
• Fed should tighten again in December, but data may not let policy makers do it
• MORE

--With assistance from Alexandra Harris, Alexandria Arnold and Katherine Greifeld. To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang

(Bloomberg) -- With core rates moving higher, some investors may have used Poland as a proxy to reduce duration risks, Morgan Stanley strategists led by Gordian Kemen say in note.

• Bank’s long recommendation for 10-year Polish bonds “was stopped out at the revised stop-loss of 3.15%, generating P&L of 12.8% including the gain in FX,” with Tuesday 9bps selloff “driven by strong industrial output, retail sales, PPI and position- unwinding from investors”
  • Ten-year bond yield falls 3bps Wednesday to 3.32%, after rising rose 21bps over the last eight days
• Morgan Stanley sticks with short HUF view and continues to recommend long PLN/HUF, targeting 73, as Hungarian central bank “left the option of further easing and additional unconventional tools on the table, while in Poland front-end yields have started to move higher in line with the stronger economic data seen this week”
  • PLN/HUF +0.2% at 72.15

To contact the reporter on this story: Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma

(Bloomberg) -- The biggest change in fiscal policy expectations has been the prospect of a bipartisan tax deal, which could eliminate the need for a deficit-neutral plan and raise projected 2018 deficits by $400 billion, BofA strategist Shyam Rajan says in report.

• A 1% deterioration in forward deficits to GDP steepens the 5s30s yield curve by 15bps, according to BofA’s estimates; they recommend steepeners in 2s5s and 3s7s portion of curve
• Fiscal easing via tax cuts could be met with a Fed that’s “behind the curve” in adjusting monetary policy, creating the potential for “highly binary” outcome and trading opportunities
• Larger deficits not offset by Fed tightening favor inflation breakevens
  • BofA shifted view to long breakevens almost a month ago, when 5Y rate was at 165bps; it’s now 177bps
  • Hold long position with target of 200bps, which would be highest since March, BofA says

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Elizabeth Stanton