HALISTER1: RESEARCH ROUNDUP: Dec Fed Hike Done Deal; Dots Won’t Change Much

RESEARCH ROUNDUP: Dec Fed Hike Done Deal; Dots Won’t Change Much

(Bloomberg) -- (Adds JPM, RBC, Renaissance to item published Dec. 9.)
  • Too soon for Fed officials to judge economic impact of Trump administration policies, based on published research from economists and strategists; FOMC is unlikely to alter its forecast for two rate hikes in 2017 in Wednesday’s decision, probably won’t adjust longer-term dots by much.
  • Dec. 14 rate hike is seen as a virtual certainty; market- implied probabilities stand at 100%; fed funds futures fully pricing one rate hike this month; all 75 Bloomberg-surveyed economists expect a 25bp increase
  • BNP, JPMorgan, Morgan Stanley are among those expecting Fed to keep 2017-2018 dots the same or little changed
  • See also: Research Roundup: U.S. employment report clears way for Fed
  • Bank of Tokyo-Mitsubishi (Chris Rupkey)
    • December hike to be followed by one 25bp hike in every quarter through 2Q 2019; UST 10Y yield to end 2017 at 3%
    • Don’t expect Yellen to continue as chair beyond the end of her current term, which ends in early 2018, given Trump statements
    • MORE
  • BNP (U.S. economics team)
    • Fed to hike fed funds rate by 25bps; expect little guidance beyond what’s already in Fed’s projections
    • Statement could include upgraded assessments in first paragraph, description of risks as appearing “balanced,” unanimous decision to hike
    • No changes seen to Fed’s median dots; too early for big changes to summary of economic projections; most on FOMC will probably wait for more clarity
    • “Elephant” at Yellen’s press conference is question of how Fed will respond to changes in fiscal outlook; impact remains “highly uncertain”
    • MORE
  • BofA (Candace Browning, others)
    • Market’s expectation for Fed hikes in coming years has room to rise
    • Inflation “party” has started, with core PCE expected to rise to 1.9% by end of 2017, “approaching if not overshooting the Fed’s 2% inflation target”
    • Economist Michelle Meyer expects Fed to hike once in 2017, three times in 2018
    • MORE
  • Credit Suisse (Praveen Korapaty, others)
    • Strengthening data “clearly” leaves Fed’s December hike intact
    • Market isn’t pricing in enough risk of Fed hikes in 2017-2018; Trump administration is likely to have passed some fiscal initiatives by 2H 2017-1H 2018
    • In phone interview, Korapaty said “we will probably get a small move up in dots;” Fed’s Dec. 13-14 meeting could be a “catalyst” for markets to start repricing number of hikes expected in 2017-2018, if Fed statement or Yellen’s press conference is more hawkish than expected
    • MORE
  • JPM (Michael Feroli)
    • Statement will convey that risks to the outlook are balanced, take no view on prospects for fiscal policy
    • Yellen to stress that it’s premature to change economic or Fed policy outlook
    • No dissents expected in decision to hike
    • Median dot for 2017 will continue to anticipate two hikes; JPM sees no compelling reason for major changes to 2018 or 2019 dots
    • MORE
  • Macquarie (Thierry Wizman)
    • Base case is for hike on Dec. 14; sees at least two, possibly three moves in 2017, with the first hike in 1H
    • UST 10Y yield to end 2017 at 3%; USD likely to soar on divergence between monetary and fiscal policy
    • MORE
  • Morgan Stanley (Ellen Zentner, Ted Wieseman, others)
    • December hike to be followed by 2017 hikes next September and December, three more in 2018
    • Fed will stick to its path for target rate for now as it’s still too early for central bank to build in assumptions around fiscal policy; expect a slight downward revision to NAIRU as well as longer-run neutral rate
    • Market possibly pricing in a “decent probability” that median dots shift higher at FOMC meeting, though current market expectations are along FOMC’s projections
    • MORE
  • RBC (Tom Porcelli, others)
    • Fed to offer sparse signals on future rate moves
    • Unlikely to be much movement in dots; “far too early to see a reversal”
    • Long-term dots to begin rising next year as FOMC reacts to higher inflation
    • MORE
  • Renaissance Macro (Neil Dutta)
    • Fed to deliver upbeat statement, reiterate “gradual approach”
    • Dots, forward rate markets appear more aligned, so there’s less risk of “sweeping changes” from FOMC
    • Yellen will reiterate that economy continues to make progress toward Fed’s dual mandate
    • MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Candace Browning (Bank of America Corp)
Chris Rupkey (Bank of Tokyo-Mitsubishi UFJ Ltd/The)
Ellen Zentner (Morgan Stanley)
Michael Feroli (Bear Stearns & Co Inc)
Michelle Meyer (Bank of America Corp)

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