4.2%-4.6% Second Half Growth? Good Luck
It was only in March when the Fed revealed its latest downward revision to 2014 GDP growth, when it announced (in the same report as the infamous "dots") that its GDP forecast "central tendency" was reduced from 2.8-3.2% to 2.8-3.0%. This was when the world was still expecting a Q1 GDP somewhere around 1.5%-2.0% (when the full severity of snow in the winter wasn't yet apparent), instead of the current consensus forecast around -0.6%. Which, when combined with the current Q2 GDP tracking forecast somewhere around 3.5%, means that for the Fed's projection to be accurate, second half growth will have to average between 4.2% and 4.6%! Said otherwise, at its June 18 meeting expect the Fed - whose forecasting record is absolutely abysmal - to "significantly" lower its GDP forecast. Because what bonds really needed was another buying catalyst...
From Bank of America:
When the Fed says policy is “data dependent,” what they really mean is “outlook dependent.” Only data that measurably change the Fed’s view on how the economy is evolving will elicit a change in their policy stance. The March economic projections look increasingly stale, with much lower growth, somewhat lower unemployment, and slightly lower inflation than forecasted. At the June meeting, we expect net dovish revisions in the FOMC forecasts.
Growth: goin’ down again
The unexpectedly soft 1Q GDP report has been followed by a fairly steady stream of further downward revisions to our 1Q tracking estimate. That estimate now stands at -0.7%. The first revision from the BEA will be released on May 29. If our estimate stands, real GDP must grow between 4.0% and 4.2% in each of the next three quarters to reach the FOMC’s central tendency. If 2Q ends up at 3.4%, as we are currently tracking, then growth in the second half of 2014 will have to average between 4.2% and 4.6% to hit the FOMC’s current projection range. That is a very high hurdle indeed. Growth expectations for the rest of this year have rarely exceeded 3% among Fed officials who have recently expressed an opinion. In other words, the FOMC is quite likely to slice their growth expectations in June. Similar revisions occurred in each of the past five years.
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All told, the FOMC may need to significantly revise down growth, perhaps modestly cut unemployment and leave inflation unchanged if they are to mark-to-market their forecasts at the June FOMC meeting. On net, this would be a modestly dovish shift, and not one to drive rates meaningfully higher.
Considering rates continue to dip and moments ago once again took out 2.50% to the downside (with the latest catalyst being frontrunning the Japanese GPIF Pension fund which appears set to buy US paper next in its scramble for yield), perhaps BofA may answer if the shift will drive rates meaningfully lower.
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