Why Would You Try To Trade This? Fed Preview

Barring some kind of truly epic surprise, we won’t get anything of note out of the Fed on Wednesday, so there’s probably not any utility in trying to handicap this. Here’s Goldman:

We expect a slightly more upbeat tone on growth that acknowledges the disruptions from the hurricanes but characterizes them as temporary or in the past tense, as we think Fed officials will view the data released over the inter-meeting period as broadly encouraging. Despite the disappointing September CPI report, we do not expect a downgrade of the inflation assessment or outlook, reflecting broadly stable year-over-year inflation and the further decline in the unemployment rate. We also expect the committee will continue to describe the risks to the outlook as “roughly balanced,” but there is a possibility that the statement upgrades the assessment of growth risks to “balanced” and leaves the inflation language unchanged (“closely monitoring”).

If you really wanted to, you could read something into today’s statement that really isn’t there, but I don’t know why you would try ahead of Trump’s Fed Chair pick and also knowing that a December hike is a foregone conclusion.

And see that’s the other thing. Is it a foregone conclusion? The market sure thinks so, but don’t forget that Donald Trump is the President of the United States. That’s a “data point” that we often forget to “correct for.” There is no telling what’s going to happen between now and the December meeting in terms of taxes, health care, and God knows what else. There’s a veritable laundry list of things that could throw markets for a loop, not the least of which is that another shoe in the Mueller probe could drop at any time. Is there anything on the horizon that would derail Yellen now and prompt them to risk their credibility by not moving in December? Well again, we don’t know.

 

For what it’s worth, Bloomberg’s Mark Cudmore has some thoughts on the Fed decision which you can find below and then below that you can find a compilation of analyst soundbites on both today’s statement and also on Trump’s imminent appointment…

Via Bloomberg

There’s much greater potential for rates to fall than rise in reaction to the Fed decision and statement on Wednesday.

  • The base case is for no major reaction in either direction. A December hike is already more than 80 percent priced with six weeks to run until the decision. There’s little room for a hawkish surprise to impact rates markets
  • Fed officials won’t pre- commit, nor do they have any desire to unnecessarily lock themselves on a set path. They won’t guarantee a December rate rise
  • The most hawkish outcome (aside from moving at this meeting) would be an improvement in the Fed’s economic outlook without a simultaneous emphasis on the failure of core personal consumption expenditure to accelerate sufficiently. But even that would lead to a climb of no more than a couple of basis points in the front end
  • And it’s unlikely to happen. Growth is solid, but not spectacular. It would be a brave stretch for the committee to upgrade its outlook. The strong advance 3Q estimate was distorted by the impact of hurricanes on net exports and inventories
  • Far more probable is that the comments on inflation are tweaked to account for the fact that CPI is picking up slower than anticipated, while the preferred core PCE measure remains close to six-year lows
  • Given that there’s no press conference and no updated dot plots, a perceived downgrade of the inflation outlook could have a real impact across rates markets, and hence all other asset prices
  • While an anticlimactic Fed decision may be a reasonable base case, it’s rare to approach such a meeting where the potential market reaction is so largely skewed in one direction

From analysts

  • 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
  • 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
  • Bloomberg Intelligence (Carl Riccadonna, Yelena Shulyatyeva)
    • FOMC meeting “is unlikely to materially impact market sentiment;” instead, it should reinforce “trajectory to the December meeting”
    • Tone of statement will stress that economy has proven resilient despite recent hurricanes
    • Minutes of meeting will be focused on assessing worries about inflation expectations
    • MORE
  • 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”
  • MFR (Joshua Shapiro)
    • A December hike “seems to be pretty much a done-deal”
    • Even so, three more moves in 2018 as implied by Fed’s dots would be “a heavy lift in the absence of more life to core inflation,” along with wage/salary gains
  • RBC (Tom Porcelli, Michael Cloherty, Jacob Oubina)
    • Powell would be “the easy choice” for Fed chair and a natural extension of Yellen at time when economy “is not screaming for a wildly different policy approach”
    • As Fed chair, he would take a patient approach identical to what’s in place now; that means another hike in December, three more next year, and a terminal funds rate “quite a bit lower” than any other cycle
    • Fed’s near-term policy isn’t likely to change much, regardless of who Trump picks to lead the central bank
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