All things related to the Fed FOMC, US Economy go here... 'Dovish' Fed Admits Inflation Weaker, Says Balance Sheet Unwind To Start "Relatively Soon" With 'zero' expectations for a rate-hike today, all eyes are focused on any shifts in The Fed's balance sheet normalization timeline ("balance sheet unwind to start relatively soon") and its most-recently-dovish inflation outlook (following the weak June CPI print, The Fed now says "inflation seen rising to 2%" but is weaker"). Key takeaways from FOMC: Balance sheet reinvesting to continue "for the time being," normalization plan to begin "relatively soon" which most sellside desks means a September announcement, leaving December for the next rate hike. Headline and core inflation "have declined," and the word "recently" after this phrase from the June statement is omitted today. This has been taken as confirmation that the Fed admits the recent dip in inflation may extend longer than the Fed expected and is the reason for the sharp drop in the USD. Inflation running below 2%, the descriptor tweaked from the "somewhat below" in the June statement No dissenters Additional headlines Fed holds rates unchanged, repeats inflation seen rising to 2% Fed: labor mkt strengthened, activity rising moderately Fed: job gains have been solid, unemployment has declined Fed: household spending, fixed investment continued to expand Fed: overall and core inflation declined, are running below 2% Fed repeats mkt-based inflation compensation gauges remain low Fed repeats survey-based inflation measures little changed Fed repeats inflation to stay ‘somewhat below’ 2% in near term Fed repeats risks to outlook appear ‘roughly balanced’ Here is a snap reaction from Citi: Judging from the USD’s inability to rally, one might conclude that the market sees this as similar enough to June, while minding a slight dovish tweak when it comes to prices. In quick summary: Inflation language – small dovish downgrade from inflation is running “slightly below” 2.0% to now “running below.” However, note that there is no change to balance of risks. Employment language – slight hawkish upgrade. From “gains have moderated but have been solid” in June to simply “gains have been solid" in the July statement. No changes to rates guidance Insert of “for the time being” in direction regarding the balance sheet. Also insert of “relatively soon” for balance sheet normalization. Largely expected by the market as we noted. Expectations were The Fed will reveal the timing of its balance sheet unwind in September and wait to hike interest rates again until December. Intriguingly, The ECB decided to shake up the market just minutes before The Fed's statement... *NOWOTNY: EURO-AREA GROWTH HAS IMPROVED BUT INFLATION LAGGING *NOWOTNY: ECB MUST RECONSIDER POLICY WITH DEFLATION RISK GONE *ECB'S NOWOTNY SEES RISK OF DISTORTIONS WITH NEGATIVE RATES *ECB'S NOWOTNY SAYS AGREES WITH WEIDMANN WHO SAID THIS IS TIME TO SLOWLY GO OFF GAS *ECB'S NOWOTNY SEES NEED TO DISCUSS TECHNICAL ASPECTS OF QE END Which sent the USD lower... * * * Rate-hike odds for July have been zero for almost two months... Notably the Fed Balance sheet really starts to shed assets in August (double July's) then accelerates again in November bigly... Since The Fed hiked rates, 'hard' data has continued to weaken (even relative to marked-down expectations) as 'soft' data has bounced hard... Since the June rate-hike (and The Fed's warning about stretched valuations), the S&P is higher and bonds and bullion are down (equally)... But the dollar has done nothing but freefall... Will we get a full card? h/t @PrestigeEcon * * * Full Redline Statement below:
Weaker Than Expected Strong ISM Manufacturing Report Aug 1, 2017 The headlines will say that today’s ISM Manufacturing report was weaker than expected, continuing a trend we have seen in the data for some months now, but the reality is that today’s report was still very strong. Just look at the commentary associated with today’s report. Whenever you see adjectives like strong, best, huge, and steady dominate, it’s a sign of strength, and this month’s commentary was littered with them. There was literally not one mention of a weaker manufacturing environment! As shown in the chart below, the headline index in this month’s report dropped from a multi-year high of 57.8 to a still strong reading of 56.3. Even at current levels, though, the index is near its highest levels of the expansion. Taking a quick look at the internals of the report, they were mostly similar to the headline index, as declines were relatively muted and mostly coming from their highest (or near highest) levels of the expansion. The only categories which showed m/m increases were Prices Paid and Import Orders. While the increase in Prices Paid makes sense given the weaker dollar, a pickup in import orders doesn’t usually go hand in hand with a weak dollar. On a y/y basis, most components of the ISM are up considerably from their levels one year ago. The only category to see a decline was Customer Inventories. As mentioned above, Import Orders was one of only two categories that ticked higher this month even as the dollar weakened. What makes this month’s increase in the Import Orders category even more significant is that it’s the highest reading in more than three years! Finally, each month ISM also asks respondents which commodities are up in price, down in price, and which are in short supply. In this month’s survey, respondents noted shortages in eight different commodities, which is extremely high by historical standards. Going back to 2000, there has never been a month where more commodities were in short supply, and the last time there were eight was back in October 2005.
Yellen Warns Of "Algo Presence" In Markets, Fears "Risks Of Excessive Optimism" While we will not see her speech or Q&A, the much anticipated speech on financial stability from Janet Yellen has just dropped. While expectations were for a 'snoozefest' speech, market volatility heading in suggested more than a little anxiety. While the core of her speech pushed back against easing financial reforms, she fears "risks of excessive optimism returning sooner or later" in financial markets and warns of the "larger presence of algorithmic traders in markets." Headlines include: *YELLEN: ALGORITHMIC TRADERS A LARGER PRESENCE IN MARKETS *YELLEN: ANY CHANGES TO FINANCIAL REGULATIONS SHOULD BE `MODEST' *YELLEN: RISKS OF EXCESSIVE OPTIMISM TO RETURN 'SOONER OR LATER' *YELLEN: CORE REFORMS BOOSTED FINANCIAL SYSTEM'S RESILIENCE Here are key highlights from Yellen's prepared remarks, via Bloomberg: Fed’s Janet Yellen said more resilient, post-crisis U.S. financial system “is better prepared to absorb, rather than amplify, adverse shocks,” yet “there is more work to do” and “we can never be sure that new crises will not occur.” Policy makers, investors should continue to monitor indicators of financial-system resilience, Yellen said Friday in text of speech at Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. “All-too-familiar risks of excessive optimism, leverage, and maturity transformation” will re-emerge “sooner or later” in new ways that require policy responses, given technology, regulation and evolution of financial system Market-based measures may not reflect true risks; supervisory metrics “are not perfect, either” Evidence shows that post-crisis reforms have made the financial system “substantially safer” Credit default swaps for large banks suggest market participants are assigning low odds to distress of a large U.S. bank Market-based assessments of the loss-absorbing capacity of big U.S. banks have moved up, and measures of equity now in range of book estimates Market liquidity for corporate bonds remains “robust overall” Healthy condition of the market is apparent in low bid-ask spreads, large volume of corporate-bond issuance Even so, “liquidity conditions are clearly evolving”; some regulations “may be affecting market liquidity somewhat”; may be benefits to simplifying parts of Volcker rule New regulatory framework has made dealers more resilient to shocks; any adjustments to framework should be “modest” Broader set of changes may deserve consideration, such as simplifying regulatory changes for small/medium-sized banks “Not altogether surprising” to see conflicting research results on effects of capital regulation on credit availability Credit may be less available to some borrowers, even if it’s “not readily apparent” that there are material adverse effects of regulation on broad lending measures Credit appears broadly available to small businesses with solid histories Which is odd as she said in June there would be no more financial crises in her lifetime? June: "I don't expect another financial crisis in our lifetime." August: "We can never be sure that new crisis will not occur." Below are some of her most interesting comments, verbatim: "I expect that the evolution of the financial system in response to global economic forces, technology, and, yes, regulation will result sooner or later in the all-too-familiar risks of excessive optimism, leverage, and maturity transformation reemerging in new ways that require policy responses." "We relearned this lesson through the pain inflicted by the crisis." "We can never be sure that new crises will not occur, but if we keep this lesson fresh in our memories--along with the painful cost that was exacted by the recent crisis--and act accordingly, we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly, sparing households and businesses some of the pain they endured during the crisis that struck a decade ago." "...algorithmic traders and institutional investors are a larger presence in various markets than previously, and the willingness of these institutions to support liquidity in stressful conditions is uncertain." "There may be benefits to simplifying aspects of the Volcker rule, which limits proprietary trading by banking firms, and to reviewing the interaction of the enhanced supplementary leverage ratio with risk-based capital requirements."
How Far & How Fast Do Markets See The Fed Tightening? Mon, Aug 9, 2021 With more and more members of the FOMC talking about the need to taper or when they expect rate hikes to occur, it's worth looking at the baseline assumptions around the pace of hikes that markets currently price. The spreads between different Eurodollar future maturities allow us to show how much markets think rates will change over a given period. As shown below, current pricing is for less than 1 hike in 2022. Pricing is more aggressive in 2023 with two hikes while years further out are around 1 hike each, with slightly more aggressive pricing in 2024 than 2025. Of course, market pricing is often wrong - in both directions. This is just what's currently priced, and the numbers aren't that dramatic: a total of just more than 5 hikes over 4 years.
Leadership Changes Coming to the Federal Reserve? Tuesday, August 10, 2021 The Chairperson of the Federal Reserve (Fed) is appointed by the President of the United States and serves a four-year term. The current Chairperson, Jerome Powell, has held that position since 2018 so his initial term is ending early next year. As such, markets are beginning to wonder if Powell will be reappointed or if President Biden will select someone else to lead the Fed. While the (re)appointment of the Fed chair has largely been a non-event, what makes this time different is that this will be the first time in modern memory that a potential leadership change is taking place just as monetary policy is about to change as well. A surprise selection by the President has the potential to add uncertainty and, thus, volatility to markets. “If monetary policy alone wasn’t already market moving, we now have to watch for a potential change in leadership at the Fed,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Markets think Powell gets another four years so a shift in leadership could potentially be disruptive for markets.” So, if not Powell, the leading candidate to replace him is Lael Brainard. A comparison between the two candidates follows: On monetary policy: Both Powell and Brainard are considered “doves” as both believe current levels of monetary accommodation are still warranted and that we still have not made substantial further progress towards full employment. On financial regulation: Brainard has expressed her frustration with Powell’s inability to aggressively regulate big banks, which recently caught the attention of the more progressive wing of the Democratic Party. The assumption here is that Brainard would use all the regulatory tools at the Fed’s disposal to head off financial excesses. On including social goals within monetary policy: Conventional wisdom is that Brainard would be more willing to incorporate social considerations when enacting monetary policy. However, Powell has put a lot of emphasis on the breadth and inclusiveness of the job market recovery, especially when it comes to lower income households and communities of color. On political ideology: While the Fed has claimed political independence, the sitting President still nominates the Fed Chair and the Senate vets the selection. Powell, a Republican, was nominated by then-President Trump, so there will likely be political pressure from Democrats to choose a candidate from their side of the aisle. Brainard, a Democrat, spent time at the U.S. Department of the Treasury and served as the deputy national economic adviser and deputy assistant to President Clinton. Our best guess is that Biden will reappoint Powell but it is not a sure thing. Powell has done a commendable job supporting markets during the COVID-19 shutdowns. Moreover, while we’re out of the recession, we aren’t through with the pandemic and we think stability and leadership continuity is important. Plus, Biden has other opportunities to influence the make-up of the Fed as the Fed Vice Chair’s term ends next January and the Vice Chair of Supervision’s term in that position ends in October 2021. Moreover, there is a vacancy on the board as Trump’s final nominees failed to garner enough Senate support to be appointed. All that said, regardless of who is ultimately appointed to lead the Fed, he/she will be chiefly responsible for overseeing a balance sheet that continues to grow. As seen on the LPL Research Chart of the Day, the Fed’s balance sheet continues to grow and will continue to grow even after the taper announcement. The Fed is buying $120 billion a month ($80 billion in Treasury securities and $40 billion in mortgage securities), adding to its over $7 trillion of bond holdings. Once the tapering process starts, the Fed will continue to purchase bonds, in ever-smaller monthly increments, until it is no longer purchasing bonds at all, which will likely be in the middle of next year. Conceivably though, the Fed’s balance sheet could eclipse $8 trillion next year. While we do not think a change in Fed leadership will change the trajectory of tapering, it may change the timing and pace of interest rate hikes. Additionally, the Fed has indicated a willingness to eventually start to reduce its balance sheet, which could be a key responsibility of the next Fed Chair. It’s still too soon to know for sure which direction Biden will go but markets will be watching.
