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30 July 2015, 04:17
CHINA CBANK INJECTS A NET 20 BLN YUAN FOR THE WEEK VIA OPEN MARKET
OPERATIONS, VERSUS A NET 30 BLN INJECTION LAST WEEK
30 July 2015, 03:48
Following the S&P recent change in the Brazil's sovereign rating (BBB-)
outlook to negative, we go through the expected rating trajectory and potential
consequences of Brazil losing IG status, from a sovereign credit, corporate
credit, and local markets perspective. We believe that only a change in the
relationship between the government and Congress can avoid a downgrade over the
next year, says Barclays.
For Brazil HC bonds, the loss of IG status (ie, two rating agencies moving to HY) would lead to exclusion from Global IG bond indices, such as the Barclays Global Agg index family. At current spread levels, and judging by yesterday's price action, the market is already positioned for a rather negative trajectory, concerns about IG index exclusion effects could lead to heightened volatility and cap potential upside for Brazilian credit at this stage.
On the FX/local markets side, any index effects should be limited, due to the BRL not being an eligible currency for the Global Agg index anyway. Although dedicated EM investors are likely to be largely insensitive to ratings, negative sentiment effects still argue for an even weaker currency, likely testing the BCB tolerance for higher inflation.
For Brazil HC bonds, the loss of IG status (ie, two rating agencies moving to HY) would lead to exclusion from Global IG bond indices, such as the Barclays Global Agg index family. At current spread levels, and judging by yesterday's price action, the market is already positioned for a rather negative trajectory, concerns about IG index exclusion effects could lead to heightened volatility and cap potential upside for Brazilian credit at this stage.
On the FX/local markets side, any index effects should be limited, due to the BRL not being an eligible currency for the Global Agg index anyway. Although dedicated EM investors are likely to be largely insensitive to ratings, negative sentiment effects still argue for an even weaker currency, likely testing the BCB tolerance for higher inflation.
FOMC expectations, near and far
30 July 2015, 02:33
Heading into the July meeting, there were two key questions on investors'
minds: (1) when would the first hike occur; and (2) how quickly would
normalisation proceed thereafter. While the answer to the second question
remains out of view, that for the former is (a little) clearer following the
July meeting.
The FOMC's optimistic outlook for the US economy depends on the consumer. Consequently, while much improvement had been seen in the labour market and in household wealth, the Committee wanted to see "further improvement in the labor market" before they were willing to begin raising rates. From today's statement, it is clear that this requirement has been partially fulfilled, with "some further improvement in the labor market" now required.
Elsewhere in the July meeting statement, there was further evidence of members' confidence in continued progress towards full employment. "The labor market continued to improve, with solid job gains and declining unemployment" was an upgrade from June's "The pace of job gains picked up while the unemployment rate remained steady". Also, on labour market slack, the tone was more definite: "a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year", versus "a range of labor market indicators suggests that underutilization of labor resources diminished somewhat" in June.
For now, inflation continues "to run below the Committee's longerrun objective" (2% PCE inflation in the medium term). However, continued gains for the labour market will provide belief that, as the remaining slack erodes, wages will firm, stoking inflation pressures. It is also fair to say that members of the Committee continue to believe much of the current disinflation will prove transitory, with the effect of the oil price decline and stronger US dollar to wane.
The final upgrade on the June statement was a more positive perspective on housing: "the housing sector has shown additional improvement. Gains for existing home sales and new construction mean the housing market is no longer a major impediment to policy; instead, 'inadequacies' still evident (like the historically-soft level of new home sales and mortgage activity) are now seen not as risks but as opportunities for growth as headwinds abate.
For the FOMC and Fed officials, it is not the level of growth relative to that achieved historically which matters; instead, it is the potential rate of growth now achievable and the degree of residual slack apparent. Their discussion of the labour market; 2016/17 FOMC growth expectations above 'longer-run' estimates; and the aptly-timed (albeit accidental) release of forecasts from Fed staff showing the output gap closing and turning positive through 2016/17 all signal the zero bound for rates is no longer appropriate, green-lighting a September first hike.
While the FOMC is soon to act (and will likely act again with only a brief delay), participants will do well not to automatically extrapolate this pace through 2016/17. That the growth forecasts of the FOMC and Fed staff are both well below that achieved pre-GFC signals the 'new norm' for rates will also be much lower. A slow and measured pace of hikes expected in 2016/17 as the data allows.
The FOMC's optimistic outlook for the US economy depends on the consumer. Consequently, while much improvement had been seen in the labour market and in household wealth, the Committee wanted to see "further improvement in the labor market" before they were willing to begin raising rates. From today's statement, it is clear that this requirement has been partially fulfilled, with "some further improvement in the labor market" now required.
Elsewhere in the July meeting statement, there was further evidence of members' confidence in continued progress towards full employment. "The labor market continued to improve, with solid job gains and declining unemployment" was an upgrade from June's "The pace of job gains picked up while the unemployment rate remained steady". Also, on labour market slack, the tone was more definite: "a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year", versus "a range of labor market indicators suggests that underutilization of labor resources diminished somewhat" in June.
For now, inflation continues "to run below the Committee's longerrun objective" (2% PCE inflation in the medium term). However, continued gains for the labour market will provide belief that, as the remaining slack erodes, wages will firm, stoking inflation pressures. It is also fair to say that members of the Committee continue to believe much of the current disinflation will prove transitory, with the effect of the oil price decline and stronger US dollar to wane.
The final upgrade on the June statement was a more positive perspective on housing: "the housing sector has shown additional improvement. Gains for existing home sales and new construction mean the housing market is no longer a major impediment to policy; instead, 'inadequacies' still evident (like the historically-soft level of new home sales and mortgage activity) are now seen not as risks but as opportunities for growth as headwinds abate.
For the FOMC and Fed officials, it is not the level of growth relative to that achieved historically which matters; instead, it is the potential rate of growth now achievable and the degree of residual slack apparent. Their discussion of the labour market; 2016/17 FOMC growth expectations above 'longer-run' estimates; and the aptly-timed (albeit accidental) release of forecasts from Fed staff showing the output gap closing and turning positive through 2016/17 all signal the zero bound for rates is no longer appropriate, green-lighting a September first hike.
While the FOMC is soon to act (and will likely act again with only a brief delay), participants will do well not to automatically extrapolate this pace through 2016/17. That the growth forecasts of the FOMC and Fed staff are both well below that achieved pre-GFC signals the 'new norm' for rates will also be much lower. A slow and measured pace of hikes expected in 2016/17 as the data allows.
FOMC: “Some” small steps toward September
30 July 2015, 02:09
The FOMC made relatively few changes to their July statement, noting better
data on net since June, and suggesting progress toward the conditions for
liftoff. The FOMC now is looking for just "some further improvement" in the
labor market. This qualification is marginally hawkish, as it constrains what
had been a more open-ended set of conditions to start hiking. That said, policy
remains data dependent, with two employment reports - plus a host of other data
- between now and the next meeting on September 17. The base case remains a
September liftoff, with a marginally higher probability than before today's
meeting. But the timing of liftoff is not certain, thanks to data dependence and
the range of views on the FOMC regarding the appropriate timing and pace of
normalization.
In the opening paragraph of the July statement, the FOMC noted that activity continued to expand "moderately." Most importantly, the labor market "continued to improve," with slack diminishing since the start of the year. Housing showed "additional improvement" while consumer spending was "moderate;" capex and trade "stayed soft." On net this reflects a modest improvement in the activity data since the June meeting.
The FOMC also dropped mention of oil prices, as they no longer appear as stable as in June. However, there were no changes to the inflation outlook: it is still seen gradually converging to target over time. Similarly, there was no explicit mention of a reduction in global uncertainty or change in the balance of risks, as some in the market had speculated. The updates were relatively small overall, but in a more positive direction that keeps September very much a "live" meeting
Other than qualifying the hiking criteria as requiring "some further improvement" in labor market conditions, the FOMC literally made no other changes to their policy language. In particular, they still say they need to be "reasonably confident" in the inflation outlook to hike, and still characterize the strong US dollar and drop in energy prices as only "transitory effects" that will "dissipate" with time. The improving labor market remains key to the Fed's forecast to gradually reach their 2% inflation target. Rates investors looking for a clearer policy signal received little satisfaction today. There was an initial modest bull steepening of the rates curve. The market is pricing in about an 8.5bp increase in the funds rate by the September meeting.
"Given our forecast for liftoff in September, we remain biased short the front end. However, the recent selloff in front-end rates since the Greek resolution has made risk-reward more neutral relative to early July," says BofA Merrill Lynch.
In the opening paragraph of the July statement, the FOMC noted that activity continued to expand "moderately." Most importantly, the labor market "continued to improve," with slack diminishing since the start of the year. Housing showed "additional improvement" while consumer spending was "moderate;" capex and trade "stayed soft." On net this reflects a modest improvement in the activity data since the June meeting.
The FOMC also dropped mention of oil prices, as they no longer appear as stable as in June. However, there were no changes to the inflation outlook: it is still seen gradually converging to target over time. Similarly, there was no explicit mention of a reduction in global uncertainty or change in the balance of risks, as some in the market had speculated. The updates were relatively small overall, but in a more positive direction that keeps September very much a "live" meeting
Other than qualifying the hiking criteria as requiring "some further improvement" in labor market conditions, the FOMC literally made no other changes to their policy language. In particular, they still say they need to be "reasonably confident" in the inflation outlook to hike, and still characterize the strong US dollar and drop in energy prices as only "transitory effects" that will "dissipate" with time. The improving labor market remains key to the Fed's forecast to gradually reach their 2% inflation target. Rates investors looking for a clearer policy signal received little satisfaction today. There was an initial modest bull steepening of the rates curve. The market is pricing in about an 8.5bp increase in the funds rate by the September meeting.
"Given our forecast for liftoff in September, we remain biased short the front end. However, the recent selloff in front-end rates since the Greek resolution has made risk-reward more neutral relative to early July," says BofA Merrill Lynch.
Fed upbeat about economy, only looking for "some" further improvement
30 July 2015, 01:50
The Federal Open Market Committee (FOMC) appears relatively upbeat in its
assessment of the economy, with the labor market exhibiting "solid job gains and
declining unemployment." Moreover, the Committee felt that the "underutilization
of labor resources has diminished since early this year" (previously qualified
as somewhat).
The FOMC did not alter its take on consumer spending, business investment nor net exports, but felt the housing sector has shown additional improvement (previously qualified as some).There was no change in the inflation assessment aside from taking out the "energy prices appears to have stabilized" part in light of the recent plunge in the barrel.
The FOMC also added one qualifier in the forward guidance section of the statement, suggesting that rate hikes will take place when the Committee sees "some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
Alongside the more upbeat economic assessment, the addition of "some" when it comes to further labor market improvement suggests that the bar for the Fed hikes is perhaps lower than earlier thought with the FOMC unlikely to wait much longer before beginning to raise rates. Of course, all Fed actions are data dependent and the Fed will only move off ZIRP if the data cooperates.
"In our view, as long as the labor market continues to add 200k jobs in the next two reports and the jobless rate continues to tick down closer to 5%, and core inflation begins to track higher, a September rate hike is very much in play and remains our base case scenario," notes TD Economics.
The Fed did not change its assessment of the risks to the outlook, which remain "nearly balanced," suggesting that unforeseen events could yet delay the September liftoff until later in the year, or even 2016.
U.S. HOUSE BENGHAZI COMMITTEE CONFIRMS HILLARY CLINTON WILL TESTIFY ON OCT. 22
The FOMC did not alter its take on consumer spending, business investment nor net exports, but felt the housing sector has shown additional improvement (previously qualified as some).There was no change in the inflation assessment aside from taking out the "energy prices appears to have stabilized" part in light of the recent plunge in the barrel.
The FOMC also added one qualifier in the forward guidance section of the statement, suggesting that rate hikes will take place when the Committee sees "some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
Alongside the more upbeat economic assessment, the addition of "some" when it comes to further labor market improvement suggests that the bar for the Fed hikes is perhaps lower than earlier thought with the FOMC unlikely to wait much longer before beginning to raise rates. Of course, all Fed actions are data dependent and the Fed will only move off ZIRP if the data cooperates.
"In our view, as long as the labor market continues to add 200k jobs in the next two reports and the jobless rate continues to tick down closer to 5%, and core inflation begins to track higher, a September rate hike is very much in play and remains our base case scenario," notes TD Economics.
The Fed did not change its assessment of the risks to the outlook, which remain "nearly balanced," suggesting that unforeseen events could yet delay the September liftoff until later in the year, or even 2016.
U.S. HOUSE BENGHAZI COMMITTEE CONFIRMS HILLARY CLINTON WILL TESTIFY ON OCT. 22
Fed upbeat about economy, only looking for "some" further improvement
30 July 2015, 01:50
The Federal Open Market Committee (FOMC) appears relatively upbeat in its
assessment of the economy, with the labor market exhibiting "solid job gains and
declining unemployment." Moreover, the Committee felt that the "underutilization
of labor resources has diminished since early this year" (previously qualified
as somewhat).
The FOMC did not alter its take on consumer spending, business investment nor net exports, but felt the housing sector has shown additional improvement (previously qualified as some).There was no change in the inflation assessment aside from taking out the "energy prices appears to have stabilized" part in light of the recent plunge in the barrel.
The FOMC also added one qualifier in the forward guidance section of the statement, suggesting that rate hikes will take place when the Committee sees "some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
Alongside the more upbeat economic assessment, the addition of "some" when it comes to further labor market improvement suggests that the bar for the Fed hikes is perhaps lower than earlier thought with the FOMC unlikely to wait much longer before beginning to raise rates. Of course, all Fed actions are data dependent and the Fed will only move off ZIRP if the data cooperates.
"In our view, as long as the labor market continues to add 200k jobs in the next two reports and the jobless rate continues to tick down closer to 5%, and core inflation begins to track higher, a September rate hike is very much in play and remains our base case scenario," notes TD Economics.
The Fed did not change its assessment of the risks to the outlook, which remain "nearly balanced," suggesting that unforeseen events could yet delay the September liftoff until later in the year, or even 2016.
The FOMC did not alter its take on consumer spending, business investment nor net exports, but felt the housing sector has shown additional improvement (previously qualified as some).There was no change in the inflation assessment aside from taking out the "energy prices appears to have stabilized" part in light of the recent plunge in the barrel.
The FOMC also added one qualifier in the forward guidance section of the statement, suggesting that rate hikes will take place when the Committee sees "some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
Alongside the more upbeat economic assessment, the addition of "some" when it comes to further labor market improvement suggests that the bar for the Fed hikes is perhaps lower than earlier thought with the FOMC unlikely to wait much longer before beginning to raise rates. Of course, all Fed actions are data dependent and the Fed will only move off ZIRP if the data cooperates.
"In our view, as long as the labor market continues to add 200k jobs in the next two reports and the jobless rate continues to tick down closer to 5%, and core inflation begins to track higher, a September rate hike is very much in play and remains our base case scenario," notes TD Economics.
The Fed did not change its assessment of the risks to the outlook, which remain "nearly balanced," suggesting that unforeseen events could yet delay the September liftoff until later in the year, or even 2016.
Americas Roundup: U.S Dollar rises as Fed upgrades view on jobs sector-July 30th, 2015
30 July 2015, 01:17
Market Roundup
- Fed: Will raise rates when some further improvement in labor market seen and 'reasonably' confident inflation will move back to 2% target.
- Fed: Risks to economy & labor market remain nearly balanced, economic activity expanding moderately, with solid jobs & declining unemployment.
- Fed: Inflation continues to run below objective, partly reflecting earlier declines in energy prices & prices of non-energy imports.
- USD sees kneejerk dive post-statement but buyers emerge, action then choppy late in day.
- U.S. June pending home sales m/m -1.8% f/c +1.0% previous 0.9%.
- IMF's Lagarde: Received letter from Greek authorities to invite IMF to work with Greece on proposed debt reform; Lagarde: A significant debt restructuring should take place for Greece.
- Weekly Crude stocks off 4.2mln bbls v 0.18mln draw f/c.
- Saudi Arabia to reduce oil production after summer.
- Speaker of House Boehner to declare support for repealing ban on U.S. crude oil exports-Industry sources.
- 22:45 New Zealand June Building Consents no f/c previous 0.0%.
- 23:50 Japan Capital flows data
- 01:30 Australia June Building Approvals f/c -0.8% previous 2.4%
- 01:30 Australia June Private House Approvals no f/c previous -8.4%
- 01:30 Australia Q2 Export Prices f/c -4.0% previous -0.8%
- 01:30 Australia Q2 Import Prices f/c +1.5% previous -0.2%
- No Significant Events
Currency Summaries
EUR/USD is supported around 1.0915 levels and currently trading at 1.0981
levels. It has made session high at 1.1077 and lows at 1.0970 levels. Euro edged
lower against US dollar on Wednesday, after slightly hawkish FOMC meeting. The
pair ahead of the meeting rose towards 1.1071 levels and subsequently declined
to hit daily lows at 1.0970 levels. The Federal Reserve said on Wednesday, The
U.S. economy and job market continue to strengthen, leaving the door open for a
possible interest rate hike when central bank policymakers next meet in
September. Fed officials said they felt the economy had overcome a first-quarter
slowdown and was expanding moderately despite a downturn in the energy sector
and headwinds from overseas. The central bank nodded in particular to solid job
gains in recent months. The statement may strengthen expectations of a rate hike
at the Fed's September meeting. To the upside, immediate resistance can be seen
at 1.1063. To the downside, major support level is located at 1.0915.
GBP/USD is supported around 1.5524 levels and currently trading at 1.5602
levels. It has made session high at 1.5684 and low at 1.5603 levels. Sterling
edged lower against US dollar after hitting four-week high on Wednesday, after
FOMC meeting. The cable was initially boosted by, signs of consumer demand in
Britain picking up. Data released on Wednesday showed, mortgage approvals in the
UK rebounding in June, while another report showed increased buying of sterling
debt by overseas investors. In early New York session, Sterling was up 0.4
percent at $1.5685, it's highest since July 1. The BoE's monetary policy
committee (MPC) meets next week, and for the first time will simultaneously
publish its decision on interest rates, the breakdown of how its policymakers
voted along with a summary of their debate, and its quarterly forecasts for
Britain's economy, including inflation. To the upside, immediate resistance can
be seen at 1.5675. To the downside, major support level is located at
1.5545.
USD/JPY is supported around 123.50 levels and currently trading at 123.95
levels. It has made session high at 124.02 and low at 123.54 levels. The US
dollar rose against Japanese yen on Wednesday, after slightly hawkish Fed's
statement. During the course of FOMC meeting the pair hit lows at 123.55, later
it rebounded in quick succession to reach daily highs at 124.01 levels. The
dollar rose against a basket of currencies on Wednesday as Federal Reserve
policy-makers upgraded their assessment on the labor market, supporting some
traders' view of a rate increase in September. With no meeting scheduled in
August, the Fed will have two months of data to analyze when it meets in
September. There were no dissents in Wednesday's vote to leave rates unchanged.
The Fed last hiked rates in 2006. To the upside, immediate resistance can be
seen at 124.15. To the downside, major support level is located at 123.50
levels. Overall trend of this pair is bullish in the long term.
USD/CAD is supported around 1.2860 levels and currently trading at 1.2945
levels. It has made session high at 1.2954 and low at 1.2858 levels. The
Canadian dollar weakened against the U.S. dollar on Wednesday as crude prices
fell, but traded within a narrow range. The loonie was still among the weakest
against a number of major currencies, as the price of oil, a key Canadian
export, marked its longest string of losses in a year on an ever-growing global
supply glut. The Canadian dollar is expected to weaken further this year,
particularly as the two central bank monetary policies diverge. The Bank of
Canada has already cut rates by 25 basis points twice this year. The Canadian
dollar traded between C$1.2860 and C$1.2968 so far in the session. To the
upside, immediate resistance can be seen at 1.2975. To the downside, major
support level is located at 1.2865 levels.
Equities Recap
European equities advanced on Wednesday, backed by strong U.S. and European
corporate earnings. The pan-European FTSEurofirst 300 closed down, up by 1
percent at 1,560.45 pts, Germany's DAX closed down, up by 0.3 percent, FTSE 100
closed down up by 1.1 percent, and France's CAC 40 closed down up by 0.8
percent. Meanwhile Italy's FTSE MIB closed down by 0.3 percent, Switzerland SMI
closed at 9,382.00 pts, up by 1.15% percent and Spain's IBEX closed down by 0.6
percent.
U.S. stocks stayed higher after the Federal Reserve offered no clear
direction but said, September hike in view but not set. Nasdaq closed up 21.20
points, or 0.42 percent, at 5,110.40, S&P 500 closed up 15.13 points, or
0.72 percent, at 2,108.38, Dow Jones closed up 120.07 points, or 0.68 percent,
at 17,750.34
Treasuries Recap
U.S. Treasury prices, which had already lost ground on Wednesday, had
little reaction to the Federal Reserve's assessment of an improving U.S. labor
market as it kept the door open for an interest rate hike, possibly as soon as
September. Shorter-dated Treasuries initially gained ground on the Fed's
statement, which highlighted that the economy had overcome a first-quarter
slowdown and was now "expanding modestly." The Fed, as expected, left in place
its zero interest rate policy.After the initial trading reactions, two-year U.S.
Treasuries were nearly unchanged at an interest rate of 0.699 percent. Benchmark
10-year U.S. Treasuries were down 5/32 of a point in price, pushing the yield -
which moves in the opposite direction - up to 2.27 percent. Earlier, the 10-year
yield hit a session high of 2.29 percent The 30-year Treasury bond lost 10/32 of
a point in price with the yield up to 2.98 percent. The yield had reached a
session high of 3.03 percent.
Commodities Recap
Gold moved up a shade on Wednesday, but remained near last week's
5-1/2-year low, after a U.S. Federal Reserve statement raised uncertainty about
the timing of a possible interest rate hike, leaving the door open for
September.
Spot gold was up 0.14 percent at $1,096.50 an ounce at 2:41 p.m. EDT (1841
GMT).
U.S. gold for August delivery settled down 0.3 percent at $1,092.60 an
ounce, prior to the statement.
U.S crude oil futures settle at $48.79/bbl, up 81 cents, 1.69 pct, U.S.
crude prices were down 0.63 percent to $47.68 a barrel, while Brent crude lost
0.41 percent to $53.08.
Front-month Brent futures rose 60 cents to $53.90 a barrel. U.S. crude for
September delivery last traded at $49.26, up $1.28 on the day.
FOMC leaves key policy rate unchanged
30 July 2015, 00:46
The FOMC kept policy unchanged and repeated the economy continues to expand
"moderately." There were no surprises in the language or signals regarding
tightening in September. However, the tone was slightly more upbeat than in
June, the Fed sounding more confident on the labour market, now noting that
that, "a range of labor market indicators suggests that underutilization of
labor resources has diminished since early this year" versus, "a range of labor
market indicators suggests that underutilization of labor resources diminished
somewhat".
The housing market continued to improve, though business fixed investment and net exports remained soft. The inflation outlook remained the same with the FOMC still looking for a move toward the 2% target. Overall, the slight upgrade to the labour market view keeps the September meeting in play.
The housing market continued to improve, though business fixed investment and net exports remained soft. The inflation outlook remained the same with the FOMC still looking for a move toward the 2% target. Overall, the slight upgrade to the labour market view keeps the September meeting in play.
FOMC: Another incremental step towards a liftoff in rates
30 July 2015, 00:19
The FOMC statement appeared to be another incremental step towards a liftoff
in rates, though with the Fed maintaining their 'data-dependent' approach,
upcoming data could be just as important to rate expectations as last night's
Fed meeting.
There were just a few small changes to the FOMC statement, and overall they can be characterized as mark-to-market adjustments of the Fed's near term economic view. The biggest update was their recognition of continued improvements in the labour market.
"The first cut of US Q2 GDP out tonight will be closely watched. Our economics team are above consensus in calling for a firm print of 3%+ q/q (consensus 2.5%), supported especially by a consumer putting in an impressive quarter close to 3%," says RBC Capital Markets.
There were just a few small changes to the FOMC statement, and overall they can be characterized as mark-to-market adjustments of the Fed's near term economic view. The biggest update was their recognition of continued improvements in the labour market.
"The first cut of US Q2 GDP out tonight will be closely watched. Our economics team are above consensus in calling for a firm print of 3%+ q/q (consensus 2.5%), supported especially by a consumer putting in an impressive quarter close to 3%," says RBC Capital Markets.
Fed remains data-dependent
29 July 2015, 23:54
As widely expected, the Fed did not offer any code word for an imminent rate
hike. However, the Fed did indicate that we are getting closer to the first rate
hike, as they added 'some' to the further improvement in the labor market that
the Committee wants to see before lift-off. However, we already knew that labor
market indicators had improved and that the first hike is closer than it was a
month ago.
The Fed dropped 'somewhat' from the assessment that underutilization of labor resources diminished, and replaced it by 'since early this year'. The fall in the unemployment rate was also acknowledged in the phrase 'the labor market continued to improve, with solid job gains and declining unemployment.' In the June statement 'the pace of job gains picked up while the unemployment rate remained steady.'
The Fed was also slightly more positive about the housing market, replacing 'some' improvement by 'additional' improvement. The FOMC repeated that economic activity has been expanding moderately, but replaced 'after having changed little during the first quarter' by 'in recent months.' This also shows a little more confidence in the post-winter reacceleration of the economy. However, it remains unclear whether the continued improvements in the labor market, the housing market, and economic activity in general will be sufficient to hike at the next meeting in September.
Market-based measures of inflation have declined substantially, it did remove the premature claim that 'energy prices appear to have stabilized.' In other words, while the FOMC has become more confident of the economic recovery, it has become less confident about the inflation outlook. The Committee still sees the risks to the outlook for economic activity and the labor market as 'nearly' balanced, and did not upgrade this to risks being 'roughly equal' as it did in 2004 before the start of the previous hiking cycle. This means that the FOMC is still concerned about the downside risks to its current outlook for the economy.
"While a September rate hike remains a distinct possibility, we still have our doubts and we continue to attach a higher probability to a December lift-off. We think that the FOMC, which has a large dovish majority, would like to see more evidence of strength in the economy and 'reasonable confidence' that inflation is moving back to target than the data are likely to provide before the September meeting", notes Rabobank.
The Fed dropped 'somewhat' from the assessment that underutilization of labor resources diminished, and replaced it by 'since early this year'. The fall in the unemployment rate was also acknowledged in the phrase 'the labor market continued to improve, with solid job gains and declining unemployment.' In the June statement 'the pace of job gains picked up while the unemployment rate remained steady.'
The Fed was also slightly more positive about the housing market, replacing 'some' improvement by 'additional' improvement. The FOMC repeated that economic activity has been expanding moderately, but replaced 'after having changed little during the first quarter' by 'in recent months.' This also shows a little more confidence in the post-winter reacceleration of the economy. However, it remains unclear whether the continued improvements in the labor market, the housing market, and economic activity in general will be sufficient to hike at the next meeting in September.
Market-based measures of inflation have declined substantially, it did remove the premature claim that 'energy prices appear to have stabilized.' In other words, while the FOMC has become more confident of the economic recovery, it has become less confident about the inflation outlook. The Committee still sees the risks to the outlook for economic activity and the labor market as 'nearly' balanced, and did not upgrade this to risks being 'roughly equal' as it did in 2004 before the start of the previous hiking cycle. This means that the FOMC is still concerned about the downside risks to its current outlook for the economy.
"While a September rate hike remains a distinct possibility, we still have our doubts and we continue to attach a higher probability to a December lift-off. We think that the FOMC, which has a large dovish majority, would like to see more evidence of strength in the economy and 'reasonable confidence' that inflation is moving back to target than the data are likely to provide before the September meeting", notes Rabobank.
Fed remains data-dependent
29 July 2015, 23:54
As widely expected, the Fed did not offer any code word for an imminent rate
hike. However, the Fed did indicate that we are getting closer to the first rate
hike, as they added 'some' to the further improvement in the labor market that
the Committee wants to see before lift-off. However, we already knew that labor
market indicators had improved and that the first hike is closer than it was a
month ago.
The Fed dropped 'somewhat' from the assessment that underutilization of labor resources diminished, and replaced it by 'since early this year'. The fall in the unemployment rate was also acknowledged in the phrase 'the labor market continued to improve, with solid job gains and declining unemployment.' In the June statement 'the pace of job gains picked up while the unemployment rate remained steady.'
The Fed was also slightly more positive about the housing market, replacing 'some' improvement by 'additional' improvement. The FOMC repeated that economic activity has been expanding moderately, but replaced 'after having changed little during the first quarter' by 'in recent months.' This also shows a little more confidence in the post-winter reacceleration of the economy. However, it remains unclear whether the continued improvements in the labor market, the housing market, and economic activity in general will be sufficient to hike at the next meeting in September.
Market-based measures of inflation have declined substantially, it did remove the premature claim that 'energy prices appear to have stabilized.' In other words, while the FOMC has become more confident of the economic recovery, it has become less confident about the inflation outlook. The Committee still sees the risks to the outlook for economic activity and the labor market as 'nearly' balanced, and did not upgrade this to risks being 'roughly equal' as it did in 2004 before the start of the previous hiking cycle. This means that the FOMC is still concerned about the downside risks to its current outlook for the economy.
"While a September rate hike remains a distinct possibility, we still have our doubts and we continue to attach a higher probability to a December lift-off. We think that the FOMC, which has a large dovish majority, would like to see more evidence of strength in the economy and 'reasonable confidence' that inflation is moving back to target than the data are likely to provide before the September meeting", notes Rabobank.
The Fed dropped 'somewhat' from the assessment that underutilization of labor resources diminished, and replaced it by 'since early this year'. The fall in the unemployment rate was also acknowledged in the phrase 'the labor market continued to improve, with solid job gains and declining unemployment.' In the June statement 'the pace of job gains picked up while the unemployment rate remained steady.'
The Fed was also slightly more positive about the housing market, replacing 'some' improvement by 'additional' improvement. The FOMC repeated that economic activity has been expanding moderately, but replaced 'after having changed little during the first quarter' by 'in recent months.' This also shows a little more confidence in the post-winter reacceleration of the economy. However, it remains unclear whether the continued improvements in the labor market, the housing market, and economic activity in general will be sufficient to hike at the next meeting in September.
Market-based measures of inflation have declined substantially, it did remove the premature claim that 'energy prices appear to have stabilized.' In other words, while the FOMC has become more confident of the economic recovery, it has become less confident about the inflation outlook. The Committee still sees the risks to the outlook for economic activity and the labor market as 'nearly' balanced, and did not upgrade this to risks being 'roughly equal' as it did in 2004 before the start of the previous hiking cycle. This means that the FOMC is still concerned about the downside risks to its current outlook for the economy.
"While a September rate hike remains a distinct possibility, we still have our doubts and we continue to attach a higher probability to a December lift-off. We think that the FOMC, which has a large dovish majority, would like to see more evidence of strength in the economy and 'reasonable confidence' that inflation is moving back to target than the data are likely to provide before the September meeting", notes Rabobank.
FOMC: Only 'some' further progress needed for September rate hike
29 July 2015, 23:32
The statement from the July FOMC meeting was very little changed compared
with the previous meeting in mid-June but it included an important 'some' in
anticipation of the first rate hike: 'The Committee anticipates that it will be
appropriate to raise the target range for the federal funds rate when it has
seen some further improvement in the labour market and is reasonably confident
that inflation will move back to its 2% objective over the medium
term'.
"In our view, the FOMC is not far from the first rate hike and we see the statement as consistent with an FOMC that remains on track to deliver a 25bp rate hike at the next meeting in September", says Danske Bank.
Nevertheless, the incoming data ahead of the meeting is decisive for the call and for the Fed to deliver the expected rate hike, we need continued progress in the labour market and indications that wage inflation is picking up or/and core inflation is bottoming. Over the next two weeks, the most important data releases will be the July employment report, the Q2 Employment Cost Index and GDP growth. Overall, solid US data in coming months are expected, with a faster improvement in labour market slack than the FOMC projects and a pickup in wage inflation.
Otherwise, the statement was almost unchanged compared with the previous meeting in mid-June. The forward-looking paragraph was the same as in June and the FOMC continues to describe the risk to the economic outlook as 'nearly balanced'.
Regarding the description since the last meeting, it was added that 'the labour market continued to improve, with solid job gains and declining unemployment. On balance, a range of labour market indicators suggests that underutilisation of labour resources has diminished since early this year'. The description of inflation was unchanged from June apart from the deletion of 'energy prices appear to have stabilised'.
The statement had limited market impact and financial markets continue to price roughly 50% probability of a first rate hike in September.
"In our view, the FOMC is not far from the first rate hike and we see the statement as consistent with an FOMC that remains on track to deliver a 25bp rate hike at the next meeting in September", says Danske Bank.
Nevertheless, the incoming data ahead of the meeting is decisive for the call and for the Fed to deliver the expected rate hike, we need continued progress in the labour market and indications that wage inflation is picking up or/and core inflation is bottoming. Over the next two weeks, the most important data releases will be the July employment report, the Q2 Employment Cost Index and GDP growth. Overall, solid US data in coming months are expected, with a faster improvement in labour market slack than the FOMC projects and a pickup in wage inflation.
Otherwise, the statement was almost unchanged compared with the previous meeting in mid-June. The forward-looking paragraph was the same as in June and the FOMC continues to describe the risk to the economic outlook as 'nearly balanced'.
Regarding the description since the last meeting, it was added that 'the labour market continued to improve, with solid job gains and declining unemployment. On balance, a range of labour market indicators suggests that underutilisation of labour resources has diminished since early this year'. The description of inflation was unchanged from June apart from the deletion of 'energy prices appear to have stabilised'.
The statement had limited market impact and financial markets continue to price roughly 50% probability of a first rate hike in September.
FOMC: Only 'some' further progress needed for September rate hike
29 July 2015, 23:31
The statement from the July FOMC meeting was very little changed compared
with the previous meeting in mid-June but it included an important 'some' in
anticipation of the first rate hike: 'The Committee anticipates that it will be
appropriate to raise the target range for the federal funds rate when it has
seen some further improvement in the labour market and is reasonably confident
that inflation will move back to its 2% objective over the medium
term'.
"In our view, this suggests the FOMC is not far from the first rate hike and we see the statement as consistent with an FOMC that remains on track to deliver a 25bp rate hike at the next meeting in September", says Danske Bank.
Nevertheless, the incoming data ahead of the meeting is decisive for the call and for the Fed to deliver the expected rate hike, we need continued progress in the labour market and indications that wage inflation is picking up or/and core inflation is bottoming. Over the next two weeks, the most important data releases will be the July employment report, the Q2 Employment Cost Index and GDP growth. Overall, solid US data in coming months are expected, with a faster improvement in labour market slack than the FOMC projects and a pickup in wage inflation.
Otherwise, the statement was almost unchanged compared with the previous meeting in mid-June. The forward-looking paragraph was the same as in June and the FOMC continues to describe the risk to the economic outlook as 'nearly balanced'.
Regarding the description since the last meeting, it was added that 'the labour market continued to improve, with solid job gains and declining unemployment. On balance, a range of labour market indicators suggests that underutilisation of labour resources has diminished since early this year'. The description of inflation was unchanged from June apart from the deletion of 'energy prices appear to have stabilised'.
The statement had limited market impact and financial markets continue to price roughly 50% probability of a first rate hike in September.
"In our view, this suggests the FOMC is not far from the first rate hike and we see the statement as consistent with an FOMC that remains on track to deliver a 25bp rate hike at the next meeting in September", says Danske Bank.
Nevertheless, the incoming data ahead of the meeting is decisive for the call and for the Fed to deliver the expected rate hike, we need continued progress in the labour market and indications that wage inflation is picking up or/and core inflation is bottoming. Over the next two weeks, the most important data releases will be the July employment report, the Q2 Employment Cost Index and GDP growth. Overall, solid US data in coming months are expected, with a faster improvement in labour market slack than the FOMC projects and a pickup in wage inflation.
Otherwise, the statement was almost unchanged compared with the previous meeting in mid-June. The forward-looking paragraph was the same as in June and the FOMC continues to describe the risk to the economic outlook as 'nearly balanced'.
Regarding the description since the last meeting, it was added that 'the labour market continued to improve, with solid job gains and declining unemployment. On balance, a range of labour market indicators suggests that underutilisation of labour resources has diminished since early this year'. The description of inflation was unchanged from June apart from the deletion of 'energy prices appear to have stabilised'.
The statement had limited market impact and financial markets continue to price roughly 50% probability of a first rate hike in September.