HALISTER1: RESEARCH ROUNDUP: Fed May Struggle to Assess Economy on Weak 1Q

RESEARCH ROUNDUP: Fed May Struggle to Assess Economy on Weak 1Q

(Bloomberg) -- (Adds ABN Amro and Deutsche Bank and updates BofAML and Morgan Stanley in item that moved April 28.)
  • FOMC gathers in Washington Tuesday and Wednesday after release of data showing weakest GDP in three years; Nomura economists, led by Lewis Alexander, say policy makers face challenge in assessing U.S. economy
  • Even if Fed doesn’t take action at this meeting, it will probably stick with three rate increases this year and prospect of changing its balance sheet policy, based on published research from economists and strategists
  • Current implied probabilities of a rate increase at the May meeting are below 15% vs ~70% for June
  • See also: U.S. Economy Grew 0.7% in First Quarter, Slowest in Three Years; Fed’s Cut in Bond Holdings May Be Messier Than Yellen Hopes
  • ABN Amro (Maritza Cabezas, Arjen van Dijkhuizen)
    • Fed to remain optimistic by suggesting 1Q slowdown was temporary and say long-run outlook remains positive, near-term risks are balanced
    • Premature for Fed to make any changes in statement regarding balance sheet
    • ABN Amro still expects next rate hike in June
  • Barclays (Michael Gapen, Rob Martin, Blerina Uruci)
    • Fed statement is likely to mention slowing 1Q activity, while signaling that normalization plans remain in place
    • Any changes to reinvestment policy won’t come until after FOMC agrees on how to scale back redemptions
    • Bar for delaying rate hike has risen; Barclays expects increases in June, September
    • MORE
  • BofAML (Michelle Meyer, Mark Cabana, others)
    • Fed will make only small tweaks in first paragraph of statement regarding current conditions, will avoid sending strong signals about June meeting
    • Policy makers likely want more data before telegraphing a message about a rate increase in June
    • Market is underpricing extent to which Fed is looking to raise rates this year and next; front-end of curve looks too flat, is vulnerable in event Fed can deliver three hikes each in 2017, 2018
  • Capital Economics (Michael Pearce)
    • Fed statement to keep prospect open for a June hike
    • Balance sheet will be another “live issue” at May meeting
    • Wouldn’t be surprised to see some discussion of balance sheet in minutes of meeting
    • MORE
  • Deutsche Bank (Peter Hooper, Joseph LaVorgna)
    • FOMC should be able to get away with minor changes in assessment of economic developments
    • Any net changes in statement are likely to be read as hawkish, rather than dovish, simply because mix of economic events probably moves FOMC closer to next rate hike
  • Goldman Sachs (Jan Hatzius, others)
    • Odds of a June hike raised to 70% from 60%
    • Upward revision is tied to continued firming pace of wage acceleration and strong growth in coming quarters
    • MORE
  • Morgan Stanley (Ellen Zentner, Matthew Hornbach, others)
    • Fed to “inch closer” to a June hike during May meeting
    • With market already pricing in more than a 60% chance of a June hike, Fed can avoid sending signals
    • MORE
    • “Out-of-consensus” expectation is for Fed to stop MBS reinvestments, leave UST side of portfolio alone: Zentner; central bank to make formal announcement in December
    • MORE
  • Nomura (Lewis Alexander, others)
    • No change seen in rates or balance sheet policy at meeting
    • Even so, policy makers may try to provide more clarity on long-term trajectory of adjustment process
    • Fed faces challenge in how to assess U.S. economy, given 1Q weakness and downside surprise in March employment/core CPI
    • MORE

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Arjen Van Dijkhuizen (ABN AMRO Bank NV)
Blerina Uruci (Barclays PLC)
Ellen Zentner (Morgan Stanley)
Jan Hatzius (Goldman Sachs Group Inc/The)
Joseph Lavorgna (Deutsche Bank AG)

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