Harkster Fed Preview - 12 June
Today’s focus... He's always dovish... right?????
Consensus: one or two cuts in 2024?
When all is done and dusted, its pretty boring when the highlight of a Fed meeting is going to be a dot plot, that nobody trusts. A point in time forecast with a track record that is as bad as Cleveland Browns success rate in the NFL (yet to win a championship in the Super Bowl era)
With limited changes expected to the statement (cautious stance on inflation and flagging the need for greater confidence in reaching the 2% inflation target), small tweaks expected to the PCE, GDP and UER forecasts, the first place the mkt will look will be the 2024 Dec Dot.... Will they go from 3 cuts straight to 1, or take it easy and stop off at 2 along their journey. Despite some improvement in inflation data, the Fed requires more consistent evidence of progress before considering rate cuts.
Statement:
Given tweaks to the statement at the last meeting, highlighting the fact there has been a lack of further progress towards the 2% goal and that risks to the mandate have moved towards better balance, they will unlikely alter the statement much.
MS warn that they may edit the sentence on the disinflation progress... "In recent months
there has been a lack of furtherprogress toward the Committee's 2 percent inflation objective has slowed."
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Dot Plots - 2 or 1 cut?
ING report a “Bloomberg survey has showed 41% of respondents (including ING) look for two cuts in 2024, but there are also 41% who expect the Fed to signal one or none.“
Fewer cuts this year might mean the easing is back loaded into 2025 and those plots shift to four cuts from three
Goldman: two cuts in 2024 (vs. three in March) to 4.875%, four cuts in 2025 (vs. three in March) to 3.875%, and three cuts in 2026 (unchanged) to 3.125%.
Goldman: two-cut baseline in 2024 provides greater flexibility to cut in Q3 if the inflation data warrant it.
BNY: 1.5 to 2 rate cuts for 2024, aligns closely with current market pricing, which forecasts a federal funds rate of ~ 4.96% by December 2024. The median projection will likely reflect this with minimal market surprise.
1 cut comes on the back of higher revisions for PCE and GDP forecasts but ING believe... "the probability of lower GDP growth and higher unemployment is why we don’t expect the Fed to go further and reduce it to just one 25bp rate cut as their central view for 2024"
Hawkish risk to the dots in the long end?
The SEP may update the longer-run neutral rate of interest, previously adjusted to 2.6% in March. Any increase in this rate could impact the long end of the US yield curve especially after today's dip to 4.27%.
Powell is likely to temper these "theoretical projections" in his speech.
Press conference = When is he hawkish?
Powell is anticipated to maintain a dovish tone during the press conference, despite elevated cost pressures and recent employment data… what could go wrong?
BofA's Alex Cohen (via LiveSquawk) “Since the Fed last hiked rates [mid-2023] this ensuing hold period (inclusive of the 23 July meeting) it has held seven meetings, with five of those interpreted as ‘dovish’, mainly due to Powell's commentary in the press conferences.
ING - the dollar has ended the day lower on the last four consecutive FOMC meetings, largely because of the dovish-sounding press conference.
What's in the price?
Post CPI and a stellar 10s auction (Japanese rotation from OATs to UST????), market is now looking for 10s to drift towards 4.05/00% and the March range lows (Chart below). Given the reduction in bullish bets and expectations of fewer rate cuts, the mkt will be wrongfooted if 4.00% trades.
The 10y auction stopped at 4.438%, 2.0bps through, which not only followed three consecutive tails, but was the biggest stop through since Feb 2023. The bid to cover popped to 2.67 from 2.486, the highest since Feb 2022, and was well above the six-auction average of 2.50.
ING - Given that market pricing for this year’s Fed easing cycle has been running with fewer than two rate cuts since around mid-April, we doubt that an adjustment in the median Dot Plot to two from three rate cuts this year will provide the dollar with much of a boost.
Dollar Strength: If the Fed's stance remains hawkish, this could lead to a stronger dollar, making short positions in EUR/USD attractive as the French election risk rises.
Source: Tradingeconomics.com
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Top Sources
Discovered on Harkster.com
ZeroHedge - FOMC Preview: From Three Rate Cuts To Two
Bloomberg - Bond Traders Quick to Abandon Long Wagers Before Fed Meeting, CPI Data
LiveSquawk - FOMC Preview: US Inflation Has Potential To Complicate Powell Messaging
Steno Research - EVERYTHING YOU NEED TO KNOW AHEAD OF THE FOMC AND CPI
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