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 Wednesday 15 June 2016

PM Bulletin: FOMC look-ahead

 

 

It’s been a peculiar few months as far as financial markets are concerned. The UK referendum on EU membership has been hovering in the background ever since the Conservatives won their slim majority in last May’s General Election. Despite this, investors have paid far more attention to the outlook for US rate hikes than they have to the possibility of a Brexit – until now.
  
Tonight’s Federal Reserve meeting lost much of its importance following the dismal Non-Farm Payroll release earlier this month. Yet just a few weeks ago members of the Fed were desperate to convince us all that a rate increase in June was a strong possibility. In fact, over the last six months we’ve been led a merry dance by the US central bank. The Fed has gone from being hawkish (December) to dovish (March) then even more dovish (April) then hawkish (May) and now dovish again.
  
As we go into this meeting the markets ascribe zero chance to the Fed hiking rates today. The weak payroll data, which has become something of a trend, together with uncertainty ahead of next week’s referendum means that a June hike is off the cards. Despite this, tonight’s meeting still offers opportunities for a surprise. This could come through the accompanying FOMC statement, or the FOMC’s summary of Economic Projections or even Janet Yellen’s subsequent press conference. So there’s still some prospect of some market movement. 
  
At a guess, I’d expect the Fed to leave the window open for a rate hike in July without being specific. Analysts will be paying close attention to the Fed’s “Dot Plot” to see how Fed members’ projections have changed since the last update in March. Back then seven Fed members were projecting three or four rate increases before year-end. This seems unlikely to be the case now. However, just one month ago we had a bunch of regional Fed presidents come out and insist that a series of rate hikes were still possible for this year. But that all came before the Non-Farm Payroll release which saw an increase of just 38,000 jobs in May on an expectation of an increase of 160,000. Nevertheless, it seems likely that Fed members will be back-pedalling on their rate hike projections. After tonight there are only a four further meetings this year: July, September, November and December. With the US Presidential Election in November it would seem very unlikely that the Fed would want to move rates (up or down) in either September or November. That doesn’t mean they won’t, just that they would rather not for fear of being accused of politicising the decision. So assuming there’s no change tonight that means July and December are in play. Yet the probability of a July hike as measured by the fed funds futures market is around 16% - down from 53% at the beginning of this month.  If the dot-plot shows a clustering around two hikes, then the probability of a July hike will shoot back up. This should lead to a bounce in the dollar. It could also see precious metals retreat, although any pull-back may be modest ahead of the UK referendum.
  
David: At a guess, I’d expect the Fed to leave the window open for a rate hike in July without being specific.
  
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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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