Here come the June Fed minutes.
These have the potential to be interesting (assuming any human traders are around to read them and be interested on this holiday week) in light of the characteristically vociferous debate about exactly what the June statement and the updated SEP and dots hold for the future.
China’s decision not to follow the Fed last month and the ensuing RRR cut underscored the policy divergence theme at a time when trade tensions were already weighing on sentiment around the yuan. Given that, any further color that suggests the Fed views risks to the outlook as transitory and is committed to hiking a total of four times in 2018 come hell or high tariffs would be notable.
Needless to say, weakness in the yuan has been front and center for the market since the Fed meeting, and further indications of policy divergence would potentially put more pressure on the Chinese currency ahead of Friday’s payrolls data in the U.S. and of course the official implementation of tariffs.
“We expect a positive tone from the June FOMC minutes and look for them to explain members’ rationale for hiking rates and signaling further steepening of the rate path. Of particular attention is the discussion of risks to the outlook in light of Chairman Powell’s confidence against the rising threat of protectionism,” Barclays wrote last weekend.
Ah, yes — “Chairman Powell’s confidence against the rising threat of protectionism”. You might recall that his comments at Sintra last month indicated that he might be getting a bit less “confident.” But don’t tell that to Wilbur Ross (or his proprietary soup can index).
Here’s BofAML’s take on the minutes:
We will look for further discussions around the amount of further policy firming necessary in the current hiking cycle as the May minutes noted that there were a “range of views” but didn’t expound further. Dovish participants will likely support slowing when reaching “neutral” while more hawkish participants will argue that the stance of policy could turn restrictive as growth remains above trend and inflation above the Fed’s symmetric target. Also, we will look to see how concerned participants are regarding the rising trade tensions and discussions around the potential impact to their economic outlook and the path of policy. In this regard, the details of the Summary of Economic Projections which reveal how the uncertainty and risks to the outlook have evolved since the March projections will be noteworthy.
“In the minutes, we will look for further discussion of trade policy and possible future realignments of IOER,” Goldman said, in their week ahead outlook.
Earlier today, the 2s10s flattened inside of 30bps, so you know, there’s that:
Without further ado, here are the bullet point highlights (note the bolded bits on trade risks, the characterization of the economy as ‘very strong’, the nod to the potential for overheating and the obligatory reference to the curve):
- “Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending.”
- “Many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.”
- “Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to continue its gradual approach to policy firming by raising the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation.”
- “With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.”
- “In general, participants viewed recent price developments as consistent with their expectation that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis, although a number of participants noted that it was premature to conclude that the Committee had achieved that objective.”
- “Although core inflation and the 12-month trimmed mean PCE inflation rate calculated by the Federal Reserve Bank of Dallas remained a little below 2 percent, many participants anticipated that high levels of resource utilization and stable inflation expectations would keep overall inflation near 2 percent over the medium term.”
- “Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.”
- “Participants generally continued to see recent fiscal policy changes as supportive of economic growth over the next few years, and a few indicated that fiscal policy posed an upside risk.”
- “Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some EMEs.”
- “A number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States.”
- “Participants discussed how the Committee’s communications might evolve over coming meetings if the economy progressed about as anticipated; in particular, a number of them noted that it might soon be appropriate to modify the language in the postmeeting statement indicating that ‘the stance of monetary policy remains accommodative.’”
- “Consistent with the June 2017 addendum to the Policy Normalization Principles and Plans, reinvestment purchases of agency MBS then are projected to fall to zero from that point onward. However, principal payments on agency MBS are sensitive to changes in various factors, particularly long-term interest rates. As a result, agency MBS principal payments could rise above the monthly redemption cap in some future scenarios and thus require MBS reinvestment purchases. In light of this possibility, the deputy manager described plans for the Desk to conduct small value purchases of agency MBS on a regular basis in order to maintain operational readiness.”
And here is the full .pdf: