As the Federal Reserve begins its July meeting, expectations are low for any significant outcome for now. Here are opinions from SEB, Bank of America Merrill Lynch and UBS, which converge towards a December move, but also leave some room for surprises:
Here is their view, courtesy of eFXnews:
Preview: FOMC In Wait & See Mode; Our Call For A Dec Hike – SEB
The two-day FOMC meeting that concludes on Wednesday will probably hold the door open to rate hikes at upcoming meetings but is not expected to move current market expectations for rate hikes much. If anything, markets may react with a stronger dollar and slightly higher interest rates after the statement is released. At the time of writing, the OIS market is discounting a 30 per cent probability of a September hike and a 53 per cent probability of a December hike. Our forecast is still for a 25 basis point hike in December.
US economic data have improved since the June FOMC meeting and the strong bounce-back in employment growth in June is particularly notable. Moreover, the two ISM surveys are trending upwards and the ISM manufacturing survey is at its highest level since February 2015. But while US financial conditions actually have eased since the June FOMC meeting, it may still be too early to sound the all-clear signal with respect to real economy Brexit effects and officials have sounded dovish recently.
According to the influential New York Fed president Dudley for example, current low inflation readings mean that the Fed could be patient when assessing the impact of Brexit. In any event, the statement should acknowledge the better data.
July FOMC: Minutes Are A Greater Market Risk – BofA Merrill
The July meeting of the Federal Open Market Committee (FOMC) is unlikely to result in any policy changes by the Fed, in our view. In fact, we do not expect the Fed to give any signals about September or subsequent meetings, maintaining its data dependent approach to a gradual hiking cycle. Markets will likely be looking for any clues of how this week‘s meeting will set up Fed policy decisions at subsequent meetings this year. Our base case remains that the Fed will next hike in December, but a September move cannot be completely ruled out. We believe the bar to hike then, however, is relatively high: the US activity data would need to remain solid, inflation indicators generally would need to point higher, and global risks would have to settle down to a dull rumble.
Our base case of a more optimistic tone to the July statement, given better data on net, should lead at most to a modest increase in market-implied probabilities of hikes this year. More substantive language changes are unlikely, in our view, but would be more market moving if they occur. Perhaps the biggest risk to market pricing will come not from this week‘s statement, but from the minutes in three weeks‘ time. Recall the sharp market reaction when the April minutes revealed significant support on the FOMC for a possible June rate hike. There is the potential for a similarly surprising amount ofFOMC interest in a September hike this time around.
Minutes: Surprise factors?
While the statement is not likely to be particularly market moving, in our view, the minutes (released three weeks later, on 17 August) could contain more scope to potentially surprise markets. The April minutes (released on 18 May) noted that“most“participants thought conditions might allow the Fed to hike in June, and markets sharply repriced accordingly. We see an elevated risk of a repeat with the July minutes. The minutes also will be watched for just how much support remains on the Committee for two hikes this year, and whether the longer-run dots might be reduced further.
Speaking of the dot plot, the Committee may spend some time discussing how to further improve the information conveyed by the Summary of Economic Projections, particularly the dot plot. The recent abrupt change in dots recorded by St. Louis Fed President Bullard–including his refusal to submit a long-run dot–has brought this communication tool to the fore again. Some change to highlight the degree of uncertainty in the policy projections seems likely in our view, although an agreement on how best to do that may not be reached at the July meeting.
FOMC: On Hold This Week; BoJ: 50% Probability Further Easing This Week – UBS
UBS expects the FOMC to leave rates unchanged in its upcoming meeting, and hike only in December by 25bps. By that time, the Fed will have a half-year of evidence with which to assess the post-referendum impact on the financial markets and economy, as well as gauge the strength in domestic economy.
JPY: BoJ Monetary Policy Meeting (Jul. 29)
Our economists think, at the same time as government economic measures are being drawn up, the BoJ will conduct additional easing at 50% probability for July, 30% for Sept, 10% for Oct-Dec, and 10% for no easing this year.
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