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BofA Warns "Risk Of Selloff" After September's FOMC

Tyler Durden's picture




 

While BofAML's Michael Hanson expects Yellen’s overall tone to remain dovish, market perception will be key. The combination of changes to the forward guidance language, upward drift of the dots, and any comments seen as potentially hawkish, could lead to a selloff...

 

Via BofAML,

Risk of a hawkish read

The September FOMC meeting may be the most anticipated in nearly a year. We expect no fundamental changes in Fed policy, despite revising the statement to clarify policy data dependence and some upward drift in the dots. The FOMC should taper by another $10bn as well. Fed Chair Janet Yellen’s press conference will set the tone for the market reaction. While we anticipate she will continue to support a patient and gradual normalization process, the risk is that markets may sell off on the perception of a less dovish Fed.

Textual analysis

The FOMC statement has been the focus of much market speculation recently. The “significant underutilization of labor resources” phrase should be retained, in our view, given the soft August jobs report and only slight improvement on net since the July meeting. Conversely the “considerable time” language is likely to revised, in our view, as several Fed officials worry it sounds too much like calendar guidance. To reinforce the data dependent nature of policy, the FOMC could suggest that they will maintain the current 0 to ¼ percent funds rate target range until there has been “considerable progress toward the dual mandate objectives.” We also expect the statement to note that these changes do not reflect a shift in policy preferences, and for Yellen to reiterate that point at the press conference. Still, the risk is that markets see these revisions as a hawkish move in the timing of liftoff.

Drifting dots

The Summary of Economic Projections (SEP) should reveal a slight revision lower for the unemployment rate forecasts for this year and next. We expect a modest upward drift to the 2015 and 2016 dots as well, as some centrist Fed officials have recently shifted to “midyear” from “second half” for their expected start to the tightening cycle. (We just updated our own forecast for the Fed’s first rate hike to June 2015 from September.) The 2017 forecasts will be included for the first time; we look for the median dot to be between 3.25 and 3.50%, with the median ex-hawks at that lower bound. The median longer-run policy rate projection should remain at 3.75%.

Recall that Governor Lael Brainard participates in the SEP for the first time at this meeting.

Market risk also drifts up

Markets are priced well below just about any reasonable variation on the median dot, and a recent San Francisco Fed paper noted that the market seems both too dovish and too certain about Fed policy as well.

 

Drifting dots thus represent a significant risk for a selloff in the markets. While we expect Yellen to de-emphasize the dots at the press conference  - they are not a consensus policy tool, after all - markets may have difficulty looking past them this time.

*  *  *

Meet the press

Finally, Chair Yellen will likely continue her more balanced discussion of the labor market outlook, yet still emphasize a patient approach to policy normalization. She also may update the discussion around the revised Exit Strategy Principles, but a formal restatement may not appear until later this year. While we expect Yellen’s overall tone to remain dovish, market perception will be key. The combination of changes to the forward guidance language, upward drift of the dots, and any comments seen as potentially hawkish, could lead to a selloff, particularly at the short end of the yield curve.

 

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Fri, 09/12/2014 - 10:43 | 5210510 himaroid
himaroid's picture

No way they come out hawkish.

Fri, 09/12/2014 - 10:47 | 5210521 Pinto Currency
Pinto Currency's picture

 

 

The Fed isn't driving this.  The BRICS are moving in another direction and the FED is posturing that it has recovered from its delusion.

This is about the USD and gold.

Fri, 09/12/2014 - 10:48 | 5210529 El Oregonian
El Oregonian's picture

No, they came out SQAWKISH...

Fri, 09/12/2014 - 11:00 | 5210555 Pinto Currency
Pinto Currency's picture

 

 

This is really scary:

http://www.portfolio-adviser.com/news/macro-news/gold-predictive-powers-to-return-ubs

A hint of the netherworld and reading entrails to know the future.

And remember, physical demand for this real asset isn't really important.

"The recent strength of the US dollar as seen through the DXY and an increasing focus on Fed normalisation suggests that gold's direction is going to be far more determined by macro factors up ahead than it has been all year, and increasingly so versus other gold price influencing variables such as physical demand."

Fri, 09/12/2014 - 11:26 | 5210719 El Oregonian
El Oregonian's picture

Hahahaha! They're STILL ain't gett'in me gold! 'cause it still be sitt'in on the bottom of the lake... 'member that terrible boat'in accident?!?...

Fri, 09/12/2014 - 11:48 | 5210832 maskone909
maskone909's picture

Aye!

these be treachourous waters for the likes of swashbucklin central banker kuntZ!

Garr!

Fri, 09/12/2014 - 13:41 | 5211402 rccalhoun
rccalhoun's picture

hawkish = 1% fed funds rate 15 months from now?  

that might invert the yield curve.

Fri, 09/12/2014 - 15:32 | 5211943 Wait What
Wait What's picture

i agree with himaroid. any lift in rates sends the USSA Titanic into a tailspin to the bottom of the ocean. its ZIRP4EVA or "harsh winter weather" becomes "harsh year-long weather"

raise your hand if you think Q1's GDP debacle was 'weather' more than it was 'rate spike' so i can slap some sense into you.

Fri, 09/12/2014 - 10:52 | 5210545 himaroid
himaroid's picture

People will soon become aware the the fed follows, does not lead.

Fri, 09/12/2014 - 11:20 | 5210679 Bear
Bear's picture

Leads from behind

Fri, 09/12/2014 - 10:44 | 5210514 disabledvet
disabledvet's picture

There is no such think as a "growth recession." You have either one or the other. We're in a mid cycle correction...long treasuries, short BofA.

Fri, 09/12/2014 - 10:56 | 5210566 himaroid
himaroid's picture

Tbonds may sell of a little more. Fed comes out dovish to prevent further equity sell off.  If they come out hawkish and the bond market does not sell off, they will be revealed. Fed has no choice. Do not let them have your treasuries.

 

Fri, 09/12/2014 - 11:09 | 5210636 Bell's 2 hearted
Bell's 2 hearted's picture

the recession dead ahead is a lot closer than the one in the rear view mirror

Fri, 09/12/2014 - 10:44 | 5210515 Dr. Engali
Dr. Engali's picture

Yeah right, like there is going to be a sell off just before the erections.

Fri, 09/12/2014 - 10:47 | 5210519 somecallmetimmah
somecallmetimmah's picture

That's what she said?

Fri, 09/12/2014 - 11:11 | 5210643 Bell's 2 hearted
Bell's 2 hearted's picture

where did i hear that before?  oh right, just before the 2008 election ...

Fri, 09/12/2014 - 10:47 | 5210523 buzzsaw99
buzzsaw99's picture

wake me when there actually IS A SPOON

Fri, 09/12/2014 - 13:30 | 5211343 Muppet
Muppet's picture

Exactly.   Always the when.

Fri, 09/12/2014 - 10:48 | 5210526 vote_libertaria...
vote_libertarian_party's picture

Fed hawkish statement = "someday...not any time soon...we maybe kinda just might raise the FFR by .0000000000001%"

Fri, 09/12/2014 - 10:47 | 5210527 RiskyBidness
RiskyBidness's picture

Our economy has been torn apart.......whereby the only economic indicator is an idiot from the FED being dovish or hawkish.  God help us!!

Fri, 09/12/2014 - 11:33 | 5210759 Everybodys All ...
Everybodys All American's picture

... and meanwhile the QE in one form or another will continue unabated via currency swaps with whatever central bank entity. How else can you possibly explain someone in Belgium of all places buying massive amounts of Treasuries recently? If this were fully disclosed by the Fed I fear the dollar would plummet in seconds. Then what?

Fri, 09/12/2014 - 10:54 | 5210540 tawdzilla
tawdzilla's picture

My spidey sense tells me Taper Tantrum Part 2 is right around the corner...which will lead to further untapering.

Fri, 09/12/2014 - 10:55 | 5210561 buzzsaw99
buzzsaw99's picture

no man knoweth the hour of the great untapering. yellen knows, but not sure s/he/it is human.

Fri, 09/12/2014 - 15:34 | 5211953 Wait What
Wait What's picture

DXY is already telling Yellen we need an untaper. historical precedent says we get 1 before year end.

Fri, 09/12/2014 - 11:16 | 5210659 Bell's 2 hearted
Bell's 2 hearted's picture

no choice but to taper

 

liquidity issues in the bond market driving the bus

Fri, 09/12/2014 - 10:53 | 5210547 madbraz
madbraz's picture

Just great, now zerohedge is the Hilsenrath of BofA...sigh

Fri, 09/12/2014 - 11:26 | 5210717 JRobby
JRobby's picture

relax, just increase the Thorazine drip. It's Friday!

Fri, 09/12/2014 - 14:19 | 5211604 Nobody For President
Nobody For President's picture

If it is just the same with you, I'll increase the wine drip.

Sauvignon Blanc, merci.

From a winery less than one mile from my homestead.

Fri, 09/12/2014 - 11:06 | 5210616 q99x2
q99x2's picture

Fuck BofA and arrest the FOMC financial terrorists.

Fri, 09/12/2014 - 11:56 | 5210785 Yen Cross
Yen Cross's picture

  Even if Mr. Yellen is taken as hawkish this shit is priced in... At least in the FX markets. Look at the aud vs everything carry unwind this week... Look at rampathon in usd/jpy.

  Where are traders going to run if the munchkin makes equities sell off? Cash/ PM's possibly/ Bonds. If she's dovish, traders will also run back into bonds. The Fed. has real credibility issues right now, and they're backed into a corner.

  Maybe she will do something stupid like raising rates, or give a hawkish speech, thinking traders will buy bonds on a selloff.

Fri, 09/12/2014 - 11:55 | 5210880 NESD
NESD's picture

Another worthless  BoA prediction.  Nothing more than a guess based on assumptions. Anyone for any flimsy reason could predict a melt-up or melt-down. Not actionable.

Fri, 09/12/2014 - 11:57 | 5210894 Professorlocknload
Professorlocknload's picture

OK, so, should I take all my assets to B of A and hand 'em over to the investment guru down there?

Fri, 09/12/2014 - 12:41 | 5211117 Number 156
Number 156's picture

BofA just wants to manipulate the Fed with scaremongering. They will be happy to suck up more taxpayer funded corporate welfare.

Fri, 09/12/2014 - 13:25 | 5211323 Eyeroller
Eyeroller's picture

<---  The Ponzi Munchkin will stick to the dove script.

<---  The Ponzi Munchkin will make another '6 months' gaff.

Fri, 09/12/2014 - 13:35 | 5211371 Ban KKiller
Ban KKiller's picture

Where do I go when I want honest accounting and truth? Why Bank of America, of course. That paragon of business acumen and foresight. 

Fuck you Bank of America, Wells Fargo, Citigroup, JP Morgan and Nationstar Mortgage, LLC. Bullies, bluff, lies and general incompetence, banksters and their willing stooges. That was just an update...

Fri, 09/12/2014 - 14:10 | 5211558 Keltner Channel Surf
Keltner Channel Surf's picture

Now that the big boys no longer get a 30 ms advance feed, they can tell us what they plan to do in advance.  How magnanimous of them, let's all trade along with them ...

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