HALISTER1: RESEARCH ROUNDUP: FOMC Statement May Point to December Rate Hike

RESEARCH ROUNDUP: FOMC Statement May Point to December Rate Hike

(Bloomberg) -- (Adds Bloomberg Intelligence, RBS, and TD to item that moved on Oct. 28.)
  • FOMC will likely keep rates on hold Wednesday, while possibly suggesting a forthcoming move at its Dec. 13-14 gathering, based on published research from economists and strategists.
  • Credit Suisse and Morgan Stanley move their calls for a hike forward to December; Credit Suisse previously saw a delay until May, Morgan Stanley most recently expected no increase through 2017
  • Market-implied probabilities stand at ~14.5% for a rate increase in November and ~70% for December; fed funds futures not fully pricing next rate increase until ~2Q 2017
  • Barclays (Michael Gapen, others)
    • FOMC’s goal at Nov. 1-2 meeting is to signal comfort with data on economy/inflation, while not appearing to pre-commit itself to action
    • Policy makers won’t send strong signal about December since market pricing is already consistent with action before year-end
    • MORE
  • Bloomberg Intelligence (Carl Riccadonna, Yelena Shulyatyeva)
    • Policy makers are on a glide path toward December hike, barring significant economic shock; should use “blunt” guidance
    • No change in fed funds rate for now from 0.25%-0.50%; statement should say economic activity has picked up from 1H
    • MORE
  • BNP (Paul Mortimer-Lee, others)
    • FOMC to make small refinements to statement, “edging closer to a hike”
    • Policy makers to acknowledge increase in inflation, further progress toward achieving balanced risks
    • Case for a hike continues to strengthen
    • MORE
  • BofA-Merrill (Michelle Meyer, strategist Ian Gordon)
    • Look for language on balance of risks that conveys Fed officials have become “incrementally more comfortable” with near-term hike than they were in September
    • Fed unlikely to explicitly mention possibility of December hike to avoid setting precedent of “such strong signaling”
    • Nov. 1-2 meeting is a “placeholder” to signal December hike
    • MORE
  • Capital Economics (Paul Ashworth)
    • Not ruling out a “surprise” hike in November, even though Fed will probably wait until December
    • Likely wouldn’t require much to persuade Fed “centrists” to join hawks and support a rate increase
    • Fed may have enough confidence now to act ahead of presidential election
    • MORE
  • Credit Suisse (James Sweeney, others)
    • Markets have accepted idea of a December hike, giving Fed room to move
    • Credit Suisse now expects Fed to lift rates by 25bps in December, compared with prior forecast of May
    • Move in December isn’t a done deal; result of Nov. 8 presidential elections will loom at FOMC deliberations
    • MORE
  • Deutsche Bank (Joseph Lavorgna, others)
    • Fed to “more strongly” signal intent to raise rates; probability is “high” that policy makers act in December
    • Would take “substantial” deterioration in data, financial conditions for Fed to “remain on sidelines at this point”
    • MORE
  • JPMorgan (Michael Feroli)
    • FOMC’s meeting should be “bit of a kabuki dance”
    • Statement could signal intent to move in December by indicating that policy makers are only looking for “some” further progress
    • “Widely understood” that it would be treacherous for Fed to hike just before election
    • MORE
  • Market Securities (Christophe Barraud)
    • Fed to note easing risks, upgrade inflation; policy makers looking to prepare investors for an interest rate increase in December
    • Near-term risks to outlook should be characterized as “nearly balanced” or “balanced”
    • MORE
  • Mizuho (Steven Ricchiuto)
    • FOMC will signal intent to hike by year-end in statement by focusing on labor market, 3Q GDP bounce
    • Statement is likely to flatten curve as 2-year note moves toward 1%
    • MORE
  • Morgan Stanley (Ellen Zentner, others)
    • Morgan Stanley changes call, now sees Fed hike in December; had most recently seen no hikes through 2017
    • October jobs report to “all but solidify a December hike”
    • FOMC to release “benign” statement, saying economy is expanding at moderate pace with solid job gains
    • MORE
  • RBC (Tom Porcelli, others)
    • Officials are “falling in line behind a December move”
    • Language in statement won’t matter much given heightened market-implied odds of a December hike
    • Fed doves favor vague language to allow for flexibility
    • MORE
  • RBS (Brian Daingerfield, others)
    • Unlikely FOMC will add guidance similar to that of October 2015 statement, as market has already priced “high chance” of December rate hike
    • Current pricing for December reduces need to use language to “pull forward expectations”
    • MORE
  • Standard Chartered (Thomas Costerg)
    • FOMC isn’t likely to give guidance on December; such guidance would be a “hawkish surprise”
    • Little change seen in statement vs September; Fed is probably comfortable with current messaging
    • MORE
  • TD (Strategists)
    • Fed to slightly upgrade statement, give no explicit flag about December
    • Statement should reflect improvement in economic conditions given 3Q growth rebound, suggest all risks have improved
    • Could also acknowledge case for hike has strengthened “without nailing down” how much more policy makers need to see
    • MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Brian Daingerfield (RBS Securities Inc)
Christophe Barraud (Kyte Group Ltd/The)
Ellen Zentner (Morgan Stanley)
Ian Gordon (Bank of America Corp)
James Sweeney (Credit Suisse Group AG)

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