Halister News

Economic Release Details: {CORRRMIN Index ECOD} --MATTHEW BRISTOW

(Bloomberg) -- The FOMC’s Oct. 31-Nov. 1 meeting is likely to produce minor word changes to statement and rates market is more focused on Donald Trump’s pick for Fed chair, based on published research from economists and strategists; investors are “consumed” by uncertainty over the identity of the central bank’s next leader and prospects for U.S. tax reform, said Morgan Stanley’s Matthew Hornbach and Guneet Dhingra.

• Report that Trump is leaning toward current policy maker Jerome Powell sent Treasury futures volumes surging during Friday’s morning session in New York, while the dollar pared gains
• BofA (Michelle Meyer, Mark Cabana, others)
  • FOMC statement likely to include small changes to economic outlook in first paragraph
  • No changes seen to description of inflation or risk assessment
  • Meeting should be a non-event for USD, with Trump’s pick for Fed chair and prospects for tax reform considerably more important drivers; rates market is also more focused on Fed chair race
  • MORE
• BMO (Aaron Kohli, Ian Lyngen)
  • Fed will follow ECB’s lead “and create the least amount of turbulence possible”
  • Future composition of Fed board is “still very much up in the air” and “there’s little to be gained from pushing market pricing (already at 80%) for December much higher”
  • A decision by Trump to choose Stanford economist John Taylor “could see Treasuries suffer for a few sessions,” while there’s some risk the market will rally right away if the president picks Powell
• Capital Economics (Paul Ashworth)
  • Meeting may provide clues on whether most policy makers still support a December hike
  • Fed is still on track to raise rates Dec. 13; recent economic data is unlikely to have altered the minds of many central bank officials
  • MORE
• JPMorgan (Michael Feroli)
  • “We would be hesitant to change our near-term Fed outlook” solely based on next U.S. central bank chair; JPMorgan holds this view “even more strongly for balance sheet policy”
  • Regardless of who leads central bank, it’s highly unlikely that FOMC will reverse current strategy of gradual, predictable roll-off of securities
  • Regional Fed bank presidents who sit on the FOMC, along with some current governors, will remain “important sources of continuity”
• Morgan Stanley (Hornbach, Dhingra)
  • TIPS breakevens could widen slightly if Fed statement is tweaked to say that survey-based measures of longer-term inflation expectations have slipped  
  • Investors could be “caught off guard” if there’s any change to Fed’s assessment of such expectations  
  • MS economists don’t expect such a change; even so, they “see a risk” 
  • MORE

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

(Bloomberg) -- Short positioning by speculators in U.S. rate futures “is not as stretched as widely believed” for three reasons, BofA strategists Shyam Rajan and Carol Zhang say in note.

• First, performance of total return funds suggests that they were short duration during September selloff and covered when 10Y yield was in 2.25%-2.30% range
• Second, auction allotment data suggests investment funds “used the weakness to buy the belly of the curve” in late September
• Third, payer skews “have not moved noticeably in this selloff,” suggesting there’s been little change in positioning
• Some of the move “has been driven more by speculation of a more hawkish Fed chair,” and has potential to reverse when the announcement is made, especially if Taylor isn’t named chair or vice chair
  • Proportion of the move explained by rise in term premiums (as opposed to repricing in Fed expectations) is lower than in prior selloffs

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Boris Korby

--DAVID MARINO