HALISTER1: RESEARCH ROUNDUP: FOMC’s Dots to Fall, Point to 1 Hike by Yr-End

RESEARCH ROUNDUP: FOMC’s Dots to Fall, Point to 1 Hike by Yr-End

(Bloomberg) -- (Adds BNP, RBC, RBS to item that moved on Sept. 19.)
  • FOMC seen as keeping rates unchanged on Sept. 21 for 6th straight meeting and suggesting one rate increase by year- end, with median dots through 2018 expected to drop, based on published research from economists and strategists.
  • Most expect a December move, with Barclays and BNP holding out for a hike this week
  • Market-implied probabilities stand at ~22% and ~30% for FOMC’s September and November meetings and above 55% for December; fed funds futures not fully pricing next rate increase until mid-2017
  • Barclays (Michael Gapen, Rob Martin, Blerina Uruci)
    • Fed to hike this week, yet it’s “close call;” case for action isn’t “iron clad”
    • Worries about inflation, unwillingness to “buck” mkt pricing could lead FOMC to pause in favor of a “strong” signal of hike by yr-end
    • Outlook has evolved in way that “clears” FOMC’s threshold for action
    • FOMC will have to ignore mkt pricing no matter when it moves
    • MORE
  • BNP (economists led by Paul Mortimer-Lee)
    • Fed to hike by 25bps this week, with decision a “close call”
    • Lower long-run dot and indications of no more hikes this year “could soften the blow”
    • If Fed doesn’t hike, it will likely try to convey a “hawkish pause,” with upgraded economic assessment and conclusions that risks are “almost balanced”
    • MORE
  • BofAML (Michelle Meyer, Ian Gordon, Mark Cabana)
    • Fed to skip rate increase this week and give “cautiously upbeat assessment,” which should lead to modestly higher front-end/real rates and mildly support USD
    • Yellen likely to make case for hike by yr-end during press conference, with emphasis on need to see continued data improvement
    • Median dot will move down to 0.625% from 0.875% in June; BofAML still expects 3 hikes in 2017 and 2018, bringing median forecasts to 1.375% and 2.125% respectively
    • MORE
  • Citi (Jabaz Mathai, Steve Kang, Jason Williams)
    • Expectations for a rate hike “extinguished effectively” by Fed Gov. Lael Brainard in recent speech; FOMC will pass on rate action this wk
    • Outright long position in FFV6 is a trade that can be justified; second trade is to pair long FFV6 with short FFF7
  • Deutsche Bank (researchers/economists led by Dominic Konstam and Joseph LaVorgna)
    • Statement may be “relatively hawkish,” despite rates remaining unchanged, if policy makers are determined to act by yr-end
    • Only minor adjustments seen to estimates for GDP, employment and inflation; shallower projected path for fed funds rate would be consistent with recent Fed commentary
    • Fed’s “hawkish hold” for September, along with potential for BOJ move on short rates and shift in QE, might be consistent with a steeper curve
  • JPMorgan (Mika Inkinen, Antoine Gaveau)
    • “Little reason” to change view that FOMC will remain on hold in September, hike in December
    • Modest changes seen in statement to reflect that risks to outlook have diminished or are nearly balanced
    • “Would not be surprised” to see at least one FOMC member expecting no hikes this yr, given Brainard’s recent remarks; more than 4 members expecting no hike “would pose some risks to our December call”
  • RBC (Tom Porcelli, Jacob Oubina)
    • FOMC may not be able to say near-term risks have diminished
    • Recent data calls into questions veracity of 2H rebound in economic growth and momentum in wage/price inflation
    • Risks of some near-term slowing are “non-trivial”
    • MORE
  • RBS (strategists led by John Briggs)
    • FOMC will leave December in play via dot plot, with “little risk” to U.S. bond market
    • Investors should buy UST 7Y “on a knee-jerk bearish move” in reaction to either BOJ or FOMC outcomes
    • MORE
  • Renaissance Macro Research (Neil Dutta)
    • BOJ’s Sept. 21 policy decision is “source of uncertainty” for Fed; main issue is extent to which BOJ is willing to commit to its 2% inflation objective
    • BOJ “disappointment” and balanced Fed risk assessment would likely lead to “significant flight to quality” across global asset mkts
    • FOMC “highly unlikely” to hike on Wed., though likely to move once by yr-end; little to warrant “meaningful” reassessment of current economic conditions in 1st paragraph of statement
  • UBS (Drew Matus, Samuel Coffin, Dave Liang)
    • FOMC to keep rates unchanged and reduce number of 2016 hikes in dots to just 1, mitigating impact of a hawkish statement; should also point to move in December
    • Projected path of rates in 2017 and 2018 should move lower, to 1.375% and 2.125% respectively; UBS still expects 2 more hikes in 2017
    • MORE
  • Wrightson ICAP (Lou Crandall)
    • Fed’s window of opportunity to hike is already closed
    • Ambiguity in near-term direction of data makes this a “ticklish” time to announce a hike
    • Will be hard for FOMC to be “overly hawkish” since statement will need to explain why policy makers aren’t hiking this month
    • Statement could be “neutral,” with Yellen delivering “close but not quite there yet” message
    • MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Antoine Gaveau (JPMorgan Chase & Co)
Blerina Uruci (Barclays PLC)
David Liang (UBS Securities LLC)
Dominic Konstam (Deutsche Bank AG)
Drew Matus (UBS Asset Management Japan Ltd)

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