Harkster Fed Preview - Nov 01
Today’s focus… Does the Fed have one more planned for us by year end?
Consensus:
Rates on hold, JPow to repeat the message he gave to the Economics Club of NY... #datadependent, #higherforlonger, another hike is still plausible, flexibility to respond to the incoming data is key and inflation has eased but is still too high for too long. (Bloomberg - Powell Says Fed ‘Proceeding Carefully,’ Leaves Door Open to Rate Hike).
Given how much we've heard from the board over the past few weeks and the fact we've not had another round of labour data or CPI, Powell will try to stick to the script delivered by the core of the Fed (Logan/Jefferson/Waller) over the past few weeks, change as little of the forward guidance as possible. His press conference should repeat what they've said throughout Oct even as FCI have tightened 50-60bps since their September meeting. There will be much needed tweaks to the statement to reflect the 4.9% Q3 performance, whilst inflation upside risks remain from energy markets (Gaza/Israel) and pay rises after UAWs 25% victory (although AHE has been ticking along nicely around 0.2% MoM)...
Doves will be watching to see if there are large changes to the statement to acknowledge the recent tightening in FCI, will JPow also feel the need to emphasis the recent tightness in the presser. Any wording change from "restrictive" to "sufficiently restrictive" and finally, USD bears will be hopeful Powell takes the Dec 2023 SEP forecasted hike off the table.
The spot view for the US is incredibly strong and makes you wonder why they're not hiking again this evening, let alone taking the Dec hike away that the USD bears want to see.
UER 3.8%... the uptick from 3.4% has been driven mainly by the labour force participation increase
The ratio of unfilled jobs to unemployed workers remains at 1.5
Core inflation 4% (2 year low)
Q3 GDP 4.9% ... I guess monetary policy is not sufficiently restrictive
The strength of the economy, as well as the fiscal impulse supports the view that the neutral rate is naturally higher.
Core PCE fell to 3.9% in August and is on track to hit the Fed's Dec target of 3.7%
Furthermore, the ex-Fed member Dudley via Bloomberg has questioned whether the Fed are doing the right thing by pausing - Federal Reserve’s Interest Rate Pause Could Go Terribly Wrong. In particular he draws the reader's attention to the following chart from A New Index to Measure U.S. Financial Conditions. FCI peaked in 2022, conditions aren't tight enough to impact growth...
However, the forward view does not look as strong as Q3 .... will the monetary lag finally hit?
FCI tightening is a clear headwind to GDP...
Banks are set to tighten credit / lending further. {Some excellent charts from Appollo's Torsten Slok on the Outlook for Banks}
The risk of overtightening that appeared in the minutes is clear as Fed real rates trend into positive territory around 2%.
Are the stars aligning for a period of below trend growth, something JPow has always wanted to assure inflation returns to 2%....
Real Fed Funds Rate
Source Bloomberg via Pepperstone
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What’s in the Price?
We do not get new SEP forecasts; the dot plot still has one hike by year end ...
The curve has priced a 40% chance of a hike between Dec and Jan meetings
Terminal rate is just 10bps higher, market discounting the likelihood of the forecasted dot being delivered due to tighter FCI
If JPow makes Dec live, it could spice things up a little for the USD as there are only 7bps priced and given the strength of the economy who would argue with more...?
ok maybe Stan, Bloomberg - Stan Druckenmiller Bets on 2-Year Notes Amid Worries Over Economy
WIRP US (Source Bloomberg)
Limited action in the vol market...
CVIX has been consistent on the 7 handle since June ... ignoring the moves in either direction from Vix and Move Index. (Chart below)
off a 1.0575 close, EURUSD breakeven for the ATM straddle is only 53bps or 1.0520 and 1.0630, expecting us to remain rangebound.
Source Bloomberg
The market to keep probing for the BoJ / MoF's new intervention zone? Oct 2022 high of 151.95 looms large on the horizon
Source Bloomberg
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Top Sources
Discovered on Harkster.com
Fed Previews that have arrived in our curated Fed channel on Harkster.com:
ZeroHedge - FOMC Preview: One Big Nothingburger Now That Treasury Is Doing The Fed's Job
Pepperstone - Playbook For The November FOMC Decision
Reuters - Fed's reverse repo facility drawdown looms large in balance sheet debate
Yardani Research - Will Powell Sound More Dovish On Wednesday?
Steno Research Fed Watch - Why should the Fed abandon the planned year-end hike?
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after many years in the business, it is getting pretty tiresome to have to hold our breath into virtually every FOMC meeting
FCI...i don't get that one...Financial Conditions Index.......Great writeup thanks...
I would add that today's ISM showed contraction continuing in manufacturing the only group of the 15 was food and tobacco as well as rubber, all other components were falling including the employment index to 46.7 from 49 in September....So Perhaps Powell is on track for a Soft Landing....
this should be a wild one..........i like your idea to buy the dip...but what to buy
thanks again