The minutes for the FOMC’s Oct/Nov meeting will be released at 2pm today, and are expected to be uneventful, just like the Fed meeting during which the central bank held rates between 1.00% and 1.25% in a unanimous vote, as expected, and where the only notable tweak was the small upgrade in the language used to describe the US economy, which is now seen to be expanding at a “solid rate” (versus “rising moderately” before), despite the disruptions caused by the recent hurricanes. This implicit upgrade prompted the market and economists to assign a virtual certainty to a December rate hike; indeed according to the CME’s FedWatch, the odds of a December rate hike are 100%.
“In recent weeks,” HSBC says, “many Fed policymakers have said that they are watching inflation closely. Even so, a number of these officials have expressed the view that they would likely be willing to support a rate hike in December.”
Still, after yesterday’s Q&A by Janet Yellen at NYU Stern, doubts have emerged, and nowhere more so than with Rafiki Capital’s Steven Englander, who cautions that today’s Minutes “are likely to point to less confidence on an inflation pickup than three hikes in the dots suggest.” He references Yellen’s comments yesterday, which “suggest that she has less confidence in the three hikes that she very likely put into her 2018 dot plot.”
Consider Yellen’s comments yesterday indicating that she is ‘very uncertain’ about the inflation path over the next year: “My colleagues and I are very uncertain that it [weak inflation] is transitory.” If you read Evans’ and Brainard’s comments they look close to a dissent on the December hike (along with Kashkari).
By contrast, the market has been pricing in more and more 2018 hiking risk. The maroon line in the chart below shows the increase in hiking expectations in recent weeks, with investors pricing in more than 1 1/2 hikes for the first time since April.”
If Englander is right, we could have “a bit of a reckoning in the two year note yield,” which as Jeff Gundlach pointed out, has soared by 15bps in November.
2 Yr UST yield now up > 50 bp in < 3 months. “Fed behind the curve” narrative joining “flattening doesn’t matter” narrative. So predictable!
— Jeffrey Gundlach (@TruthGundlach) November 21, 2017
That said, Englander concedes that ultimately tax reform will be more important for bonds “so expect any drop in yields to be temporary” unless of course, tax reform fails.
As for equities, Englander states that while “appetite for risk may still be shaky” (one wonders just what about S&P 2,600 suggests risk appetite is shaky) “look for the somewhat dovish tone to the Minutes on inflation along with increased optimism on activity to firm up risk appetite. The long term takeaway for investors is that the Fed is shifting from tightening because it worries about an inflation pickup to opportunistic tightening to move away form the zero bound without damaging activity. This is a positive for risk appetite and expectations of the durability of the expansion.”
Actually, we disagree: the fact that financial conditions have not tightened one inch since the Fed has started hiking, shows perfectly well that the market is convinced that the moment equities suffer a selloff, the Fed will either back off hiking, or will launch QE4. That is what is positive for risk appetite, and it will be up to the Fed to disabuse the market of this assumption which will lead to the “irrational exuberance” bubble Goldman warned about yesterday.
Englander’s bottom line: “December is firmly grounded, but quite possibly with dissents, and the there is more open mind on structural disinflation than the three hikes dot plot consensus would suggest.“
So what are other banks saying? Here is a breakdown courtesy of RanSquawk:
- BARCLAYS: The only real surprise in the November FOMC statement was the upgrade of the assessment of economic activity relative to prior months. Outside of that modest alteration, the remainder of the statement was in line with our expectation. We believe there is a consensus within the committee for a third rate hike this year in December and look for the minutes to provide confirmation of this intended action. That said, we also believe there is willingness by some committee members to pause and assess where inflation trends are before signalling confidence about the appropriate policy path next year. Hence, we expect language that expresses concern about recent inflation trends and whether disinflation this year is persistent or transitory in nature.
- DB: While we do not expect anything in the minutes to dissuade market participants from assigning a high likelihood of a December rate hike, several Fed officials, including 2018 FOMC voters Bostic, Mester, and Williams have signalled an openness to rethinking the Fed’s broader operating framework. In turn, we would not be surprised to see officials beginning to discuss potentially major changes to elements of its operating framework that could include the inflation target or other related strategies such as price level targeting. Former Fed chair Bernanke has also recently weighed in on this topic, arguing in favor of temporary price level targeting if the fed funds rate hits the effective lower bound in the future. While Chair Yellen’s appearance on Tuesday evening at NYU Stern Business School is being billed as a conversation with Mervyn King, the debate around inflation targeting, which has been the mantra of most central banks for the last several decades, could be a notable feature of the discussion.
- HSBC: We do not expect any major surprises to come from the minutes of the 31 October to 1 November meeting. The policy statement released in November described economic activity as “solid”, despite the recent hurricanes. In addition, the statement noted that inflation was expected to remain below 2% in the near term but to stabilise around the 2% target over the medium term. In recent weeks, many Fed policymakers have said that they are watching inflation closely. Even so, a number of these officials have expressed the view that they would likely be willing to support a rate hike in December. The November statement had little new to say about the balance sheet normalisation programme initiated by the Fed in October. However, the minutes of the meeting are likely to show some discussion by the Fed staff and policymakers regarding how the programme is proceeding so far.
- ING: The FOMC minutes (Wed) will continue to allude to diverging views within the committee and is unlikely inspire much upside in US rates or the USD this week. Nonetheless, we expect the markets’ Fed-obsession to come to a halt in 2018 as monetary policy re-pricing opportunities look to be greater elsewhere.
- MORGAN STANLEY: The FOMC minutes are often revised nearly all the way up until the release and can be edited to stress important points. We look for the Fed to resume its gradual path of rate hikes again in December.
- RBC: FOMC Meeting Minutes (Wed): We don’t expect any significant news from the minutes of the November 1st FOMC meeting, which is fortunate because most market participants will be busy baking pumpkin pies when it is released at 2pm on Wednesday. There will be a brief discussion of the impact of the hurricanes, but the statement already indicated that the FOMC believes “the storms are unlikely to materially alter the course of the national economy over the medium term”. There is also a very slim chance that the FOMC begins to discuss the ultimate size of the Fed balance sheet (short answer: unless you know the LCR rules in the future and the relative spread between IOER and short Treasuries, you can’t know the ultimate size of the balance sheet).
- TD SECURITIES: Markets all but fully expect a Dec rate hike, with around 1.5 hikes priced for 2018. Thus we expect the market to largely look past debates around Dec in the Nov FOMC minutes as old news. The bigger question is whether they give any signal about the path for rates next year. Our base case is that there won’t be enough clarity in the discussion to suggest clear changes to the Dec dot plot.
via http://ift.tt/2hKUFfb Tyler Durden