We would say that this week will surely be “all about the Fed” but it is never a safe bet to suggest that a given week will be “all about” anything other than the Trump administration and over the weekend, the President underscored that point.
We’d be absolutely remiss not to mention that Trump was servin’ up the “smocking”-hot “covfefe” all day on Sunday, taking to Twitter to weigh in on everything from Mueller, to Jeff Sessions, to migrant babies, to “smugglers”, to Saturday Night Live. Any time he does this, it’s usually a leading indicator that something (else) is coming from the special counsel’s office. So, you know, just be aware of that. Unfortunately, there’s no way to “hedge” against Mueller tape bombs unless you count selling everything ahead of them which is what some folks apparently did on Friday.
Additionally, the White House is obviously in the midst of yet another staff shakeup, and suffice to say it’s not entirely clear that Mick Mulvaney is the man for the job when it comes to fostering the kind of bipartisanship that will help avoid the government shutdown Trump insists he’ll be “proud” to own. One assumes John Kelly is going to linger for a while, though, and hopefully that will help.
On the Fed, the market wants to hear something dovish. That much is clear. A hike is widely expected, and you shouldn’t be at all surprised if Trump weighs in again before Wednesday to reiterate that he will be profoundly displeased if Powell pulls the trigger.
Since Powell’s “long way from neutral” boondoggle, financial conditions have tightened some ~80bps on Goldman’s index. Stocks, meanwhile, are hating life.
Here’s a look at the S&P, IG spreads and Libor since October 3, the day Powell’s “plain English” finally broke something.
One would think the statement (and the tone of the presser) will generally reflect what was conveyed in the November minutes. That is, you’d think the language around “further gradual” will be tweaked and you’d expect a reiteration of data dependence which, in the current environment, would be dovish.
“We find that the Fed has historically delivered ‘dovish surprises’ following FCI tightening of 50bp or more, with the two-year yield rallying 3bp an average on associated FOMC statement days”, Goldman writes, in their Fed preview. Here’s what the bank expects from the statement:
Goldman also notes that if you’re looking for a conciliatory message from the Powell Fed, “the SEP might well be the most dovish aspect of next week’s meeting.” Specifically, the bank sees the Fed downgrading the 2019 growth projection by 0.2pp. “While the hurdle is fairly high for the 2019 GDP growth median to fall by two tenths—it would require 6 additional projections at or below +2.3%—the magnitude of the FCI tightening suggests that such a change is indeed likely”, the bank writes, on the way to suggesting that while the “inflation projections are likely to fall on net”, that will just reflect “‘mark to market’ effects.” On the dots, Goldman sees “dovish revisions that drop a hike from the 2019 baseline.”
For their part, SocGen sees the median projection for next year dropping to two from three as well. The bank’s Omair Sharif also writes the following in a note dated Friday:
The top end of the distribution shifts lower, making for a “dovish” hike. We think there is about a two-thirds chance of this happening, and we cannot rule out that the median stays at three hikes. Because of our expectation that 2019 will fall to two hikes, we expect that 2020 will now show two hikes versus one previously. We expect a slightly more dovish distribution than in September, but not by enough to change the 2020 median of 3.4%. The 2021 projection of no hikes will likely remain the same. We expect that the longer-term neutral rate will remain at 3.0%, although there is a risk it could fall to 2.90%.
Barclays, on the other hand, isn’t so sure about the 2019 median dot. “We expect the median dot plot to remain unchanged, indicating three hikes for 2019, but we believe the average is likely to come down as some committee members mark down their rate projections”, the bank says, on the way to noting the obvious, which is that “the market will be looking for a validation of the dovish narrative it has developed in the previous weeks and that has brought it to price less than one hike in 2019.”
Barclays also suggests that if the statement does indeed reflect what was communicated in the November minutes, the market isn’t likely to be particularly surprised (where “surprised” presumably means “impressed”). “The statement is likely to reiterate the Fed’s shift toward data-dependency and we expect modifications to soften the language on forward guidance on future rate hikes, indicating instead that ‘some’ additional gradual increases in rates are likely”, the bank says, suggesting that because “this would be in line with recent communication that has emphasized a balance-of-risk assessment approach and data-dependency, [it] should not come as a surprise to markets.”
Here’s a possibly useful summary of recent Fed communications as compiled by Goldman (these are all just quotes):
Despite the continual pricing out of the Fed in 2019, the dollar has remained resilient. Dollar longs came off a bit in the week through Tuesday, but remember, we’re starting from the highest level since January 2016 and the position is still very stretched.
For what it’s worth, specs rebuilt the 10Y short a bit in the week through Tuesday. Here’s where things stand on that (with 10Y yield plotted on top):
Oh, and you can of course expect another technical tweak (i.e., lifting IOER by 20bp rather than 25bp) in an effort to wrest back control of this situation:
The never-ending story
Also on deck this week is the BoJ. One thing we would note (and we try to bring this up from time to time) it that there’s a decent argument to be made that one of the biggest risks to markets is an unexpected BoJ tweak that accidentally catalyzes a JGB tantrum. This risk has been lurking in the background for years and if it ever comes calling, it will be something to behold. Last week, the BoJ cut purchases in the 5-10Y sector for the first time since June, but ultimately, JGB yields are back to their lowest since the summer, before the July policy tweaks that briefly brought this moribund market back to life.
It’s always the same story for the BoJ – there’s no way out of Neverland for Kuroda, although the ongoing “stealth taper” is at least evidence that it’s possible to try without things completely falling apart. Anything that can be construed as even remotely “hawkish” (an exceptionally relative term when you’re talking about the BoJ) risks catalyzing yen strength which turn undercuts the inflation target that they aren’t anywhere close to hitting anyway. The yen’s safe haven status complicates things further, especially during times when uncertainty is high – like now.
“Given the rapidly heightened risk-off sentiment in the markets (chiefly due to concerns about escalating trade friction between the US and China and a slowdown in the global economy, as well as the complicated Brexit process), we expect discussions at the MPM and Governor Kuroda’s press conference to center on the possible impact on the Japanese economy of such external factors”, Goldman says, before noting that despite the side effects (which the BoJ has begun to emphasize), “the leeway for possible countermeasures on the monetary policy front if the situation deteriorated further could become part of the debate [and] as such, we expect a dovish tilt in comments from Governor Kuroda.”
Barclays generally agrees. “Governor Kuroda’s press conference will still be a focus in formulating an outlook for policy into 2019”, the bank wrote on Sunday, adding that “concerns around US-China trade issues and global growth slowdown, discussions around the side-effects of BoJ policy on the profits of financial institutions, and the methods for flexibly managing monetary policy – points raised at the previous MPM – will continue to attract attention.”
Backseat to Brexit for BoE
The BoE is on deck as well, and the meeting will take a backseat to recent political turmoil. Long story short, a second Brexit referendum is now a very real possibility.
May survived last week’s party no-confidence vote, but in the days that followed, chatter around a new referendum has picked up. On Sunday, for instance, the Times reported that the number of May’s cabinet allies who are pushing for MPs to vote on any and all Brexit options has climbed to 8.
The Riksbank is up as well and there’s no shortage of data on the docket for developed economies including GDP, CPI, RPI, PPI, and House Prices in the U.K., PCE, personal income, consumption & spending and U. of Mich. sentiment in the U.S., and CPI and the trade balance in Japan.
Oh, and as if that wasn’t enough, it’s Central Economic Work Conference week in China. You can bet that will be watched closely for obvious reasons.