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Goldman Expects "Steady As She Goes" FOMC With QE Ending On Schedule

Tyler Durden's picture




 

Of the last 150 years of developed market monetary policy, we suspect nothing will prepare market participants or Fed members for the twisted terms and double-speak the FOMC will try to unleash today as they attempt to 'end' the most extreme policy measures ever. Goldman Sachs' 'base-case' for today's FOMC is a "steady as she goes" message with few substantive changes in language and asset purchases ending on schedule... but Goldman warns, recent macro and market action might bias the Fed dovish.

 

The last 150 years (as we previously showed)...

 

 

And today's preview...The main event today will be the FOMC statement.  

Our US economists expect the FOMC to make only minor adjustments to the statement. They expect the Committee to maintain its “considerable time” guidance and assessment of “significant underutilization” in the labour market while also drawing down their asset purchases to zero. While their base case is that the statement will acknowledge recent developments overseas, they do not expect the FOMC to shift its assessment of the domestic outlook.

In today’s Global Markets Daily, we examine the potential market impact of today’s FOMC.

Our view is that recent market moves, including the drop in oil prices, could cause a dovish shift by the FOMC on inflation. We see this as a risk for the Dollar, which – after a large move in the 2-year rate differential against it – has been held up by risk aversion and safe haven flows into the US. As a result, today’s Global Markets Daily argues that, even with the bounce back in the SPX, stocks offer better risk-reward into the FOMC than the Dollar.

The global growth scare has moved interest rates against the USD
Over the last month, global growth fears have taken over markets. As our most recent FX Views argued, this has weighed on the Dollar, with the 2-year rate differential – the key driver of the Dollar in recent months – falling the most since the “no taper” surprise in 2013. This is notable, given that recent growth fears come from outside the US (as opposed to inside). For example, the IMF’s recent World Economic Outlook lowered the 2015 growth forecasts for the Euro area, Japan and some emerging markets, but kept growth the same for the US. This is consistent with the analysis by Jan Hatzius and team, who find that the effects from a stronger Dollar are roughly offset by lower oil prices, keeping our bullish growth view intact. In short, it is rather puzzling that the 2-year differential has moved so sharply against the Dollar, given that the case for US cyclical outperformance has, if anything, become stronger. We next provide a highly approximate breakdown of what has driven rates markets so sharply against the USD in recent weeks.

Since October 3 (the positive payrolls surprise), the trade-weighted 2-year rate differential of the US vis-à-vis the majors has fallen 15bp, with three factors looking to be the main drivers:

Foreign growth drag: the surprise drop in German industrial production on October 7 (data for the month of August), which coincided with the SPX falling close to 1.5%, moved the 2-year differential nearly 3-4bp against the Dollar.

 

Dovish Fed speak: The FOMC minutes for September, published on October 8, and comments by Fed Vice Chair Fischer (October 9) at the IMF/World Bank annual meetings highlighted the negative implications for US growth and inflation from a stronger USD and drove the 2-year differential another 7bp against the USD.

 

Mounting Ebola fears: headlines over the weekend of October 11/12 reported a second Ebola case in Dallas, whereupon the 2-year differential fell another 3-4bp.

Of course, this attribution is highly approximate, but it is interesting for what matters and what does not. In the latter camp is the negative retail sales surprise that sent markets into a tailspin on October 15. After an initial knee-jerk reaction, the 2-year rate differential is essentially unchanged from before that release. Instead, rates markets seem to have put the greatest weight on dovish Fed speak, which accounts for roughly half the Dollar-negative move in 2-year rates, while the foreign growth drag and Ebola fears might make up the remainder.

Risk-reward into the FOMC favours SPX over the Dollar
Two weeks ago, we argued that a rise in risk aversion supported the Dollar even as rates markets moved sharply against it. At the time, we thought that this combination – a Dollar-negative move in rates versus a Dollar-positive rise in risk aversion – made things a bit tricky for the USD. Given that risk appetite was holding up the USD in the face of low US interest rates, a dovish shift from the Fed could leave the Dollar vulnerable in the near term. We now re-examine that view as we head into the FOMC.

Our base case for today could be called “steady as she goes”:

(i) the FOMC ends QE3 with a final taper;

 

(ii) the “considerable time” forward guidance is adjusted only minimally, dropping the reference to asset purchases; and

 

(iii) other changes are small, with the “significant underutilization” phrase to describe labour market slack staying on, a possible acknowledgement of weaker growth abroad, but an unchanged risk assessment for the US that keeps the “nearly balanced” wording.

In our view, such a business as usual statement signals that, despite a weaker global growth outlook, the Fed remains optimistic on the US. In our view, this would see front-end rates and SPX rise, while the Dollar could well tread water, as the move in front-end rates is offset by improving risk appetite (as growth worries in the market abate on the Fed’s business as usual message).

On the dovish side, the main risk is an introduction of downside risks to inflation, which could weigh on front-end rates and the Dollar, while sending SPX higher. Even though market pricing has pushed the first Fed hike into Q4 2015, this scenario could see sizeable market moves since it would inevitably re-start a debate over the Fed’s reaction function. We think this scenario is unlikely, given that survey-based measures of inflation expectations remain stable and that the FOMC is more focused on core rather than headline inflation. It is also possible that the Committee downgrades its risk assessment for US growth, but again we see this as unlikely given that we are tracking Q3 above 3%. While an extension of asset purchases beyond this meeting was flagged by St. Louis Fed President Bullard, we think communication just prior to the start of the blackout period has made it clear that this will likely be the final taper.

On the hawkish side, any change in the “significant underutilization” language (for example, to “slack remains elevated”) would see the front-end interest rates and the Dollar move up, while SPX would likely fall, weighed down by rising rates and, potentially, a move up in risk aversion. Given that this language only went into the statement in July, this is unlikely at this stage, in particular since this meeting does not have a press conference. A hawkish surprise would also be no acknowledgement of weaker global growth. Again, given that this was perhaps the main talking point at the recent IMF/World Bank annual meetings, we see this as unlikely.

Goldman's Exit 101...

 

Source: Goldman Sachs

 

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Wed, 10/29/2014 - 11:53 | 5389995 Sudden Debt
Sudden Debt's picture

Goldman expects...?

Aren't they the EXACT SAME GOES THAT RUN THE FOMC IN THE FIRST PLACE??

But it would be more weird I guess if they "expected" it all to turn into a bumfire...

Wed, 10/29/2014 - 11:57 | 5390010 PR Guy
PR Guy's picture

 

 

Asset bubbles won't go away you know. Look at the price of this artwork!!

 

http://linkd.in/1thqmNL

 

 

Wed, 10/29/2014 - 13:26 | 5390434 Manthong
Manthong's picture

"Steady As She Goes"

Yes, a nice steady 60 degrees down bubble.

https://answers.yahoo.com/question/index?qid=20060616154830AAKr7pe


 

Wed, 10/29/2014 - 11:56 | 5390011 observer007
observer007's picture

#Ebola

The World Health Organization says the number of reported Ebola cases has surpassed 13,700, a jump of more than 30% since the last numbers were released four days ago.

 

latest:

http://tersee.com/#!q=ebola&t=text

Wed, 10/29/2014 - 11:58 | 5390024 blunderdog
blunderdog's picture

I predicted I was gonna take a shit after my coffee this morning.  I'm like precognitive and shit.

Wed, 10/29/2014 - 13:03 | 5390348 KnuckleDragger-X
KnuckleDragger-X's picture

We really need a new word to describe the Goldman market spew, it would save me the time I spend spouting thousands of obscenities at their pronouncements.....

Wed, 10/29/2014 - 11:54 | 5390007 dracos_ghost
dracos_ghost's picture

Wow, way to go out on a limb GS. Justifies the million dollar payday.

Wed, 10/29/2014 - 11:57 | 5390017 NotApplicable
NotApplicable's picture

Well, there went my insomnia!

Wed, 10/29/2014 - 11:58 | 5390029 kg2601
kg2601's picture

who actually reads their crap?

Wed, 10/29/2014 - 12:00 | 5390034 Stoploss
Stoploss's picture

If Barry allows Saudi to bang oil down to 70, we go straight to (official) recession. End of discussion.

Wed, 10/29/2014 - 11:59 | 5390038 HardlyZero
HardlyZero's picture

Dovish or Hawkish its all gibberish for the BROKE FED.

Fiat value is now unconstrained in the markets.

USD is not finding support today.

Wed, 10/29/2014 - 12:00 | 5390041 buzzsaw99
buzzsaw99's picture

On the hawkish side... LMFAO

Wed, 10/29/2014 - 12:50 | 5390266 disabledvet
disabledvet's picture

Yeah, that is kinda funny actually. "Now we know who the Real Free Shit Army is!"

Wed, 10/29/2014 - 12:02 | 5390042 nakki
nakki's picture

Keep it going because 4 years isn't enough time to tell if this is working.

Wed, 10/29/2014 - 12:01 | 5390043 dontgoforit
dontgoforit's picture

Flat liner....

Wed, 10/29/2014 - 12:03 | 5390047 Keltner Channel Surf
Keltner Channel Surf's picture

Backed by Moe Tucker’s insistent drumming, Lou Reed begins to sing:

I'm waiting for The Fed
Twenty-six SPY calls in the red
Up to resistance, but no new highs
Feel sick and dirty, more dead than alive
I'm waiting for the Fed
 

“Hey, white bull, what you doin' uptown?
Hey bull, you pushin' our short stops around?“
Oh pardon me sir, it's furthest from my mind
Lookin' for Bullard -- he’s a dear, dear friend of mine
I'm waiting for The Fed

Wed, 10/29/2014 - 12:06 | 5390058 Squid Viscous
Squid Viscous's picture

wow, Lou Reed - really? one of the most talent-less hacks of the "rock and roll" era

that being said, i like what you did with the lyrics...

Wed, 10/29/2014 - 12:10 | 5390088 Keltner Channel Surf
Keltner Channel Surf's picture

Ah, but this is Velvet Underground era Lou Reed, quite a different animal.

Wed, 10/29/2014 - 12:04 | 5390052 Unknown Poster
Unknown Poster's picture

GS, the Sages of wall street.

Wed, 10/29/2014 - 12:03 | 5390053 Bell's 2 hearted
Bell's 2 hearted's picture

i'm just dumb sheeple ... need another "expert" opinion ... anyone heard of Sage Kelly??  

Wed, 10/29/2014 - 12:15 | 5390113 dontgoforit
dontgoforit's picture

Related to Parsley Sane?

Wed, 10/29/2014 - 13:05 | 5390354 KnuckleDragger-X
KnuckleDragger-X's picture

Rosemary and thyme....

Wed, 10/29/2014 - 12:07 | 5390071 wmbz
wmbz's picture

Goldman,fed,fed,goldman, potato, potahto. Same damn difference!

Wed, 10/29/2014 - 12:15 | 5390115 Callz d Ballz
Callz d Ballz's picture

The last week has been an escape hatch for those in the know, heads roll when the "she's steady as she goes" without percieved QE4 sinks in.   

Wed, 10/29/2014 - 12:16 | 5390123 SheepDog-One
SheepDog-One's picture

The free crack party is dead! Long live the rejuvenated free crack party!

Wed, 10/29/2014 - 12:20 | 5390145 Callz d Ballz
Callz d Ballz's picture

The QE4 difibrillator will have a weaker charge.

Wed, 10/29/2014 - 12:23 | 5390156 madbraz
madbraz's picture

Goldman:  our motley crew of economists, expect that no matter what is said at the FMOC, stocks will go up. Long live Bill Dudley, the man behind the most manipulated stock market in history.

Wed, 10/29/2014 - 12:29 | 5390177 Otto Zitte
Otto Zitte's picture

Just the tip my little muppet, my precious. My preciousss

Wed, 10/29/2014 - 12:39 | 5390197 Kirk2NCC1701
Kirk2NCC1701's picture

A squid is as a squid does. Watch its tentacles and keep a safe distance.

Wed, 10/29/2014 - 12:47 | 5390242 gmak
gmak's picture

Don't you think that 'everyone' who manages money already knows QE is ending? What's the big deal? Expect a whipsaw up and down (or vice versa) from the algos as they run stops and open orders on both sides of the fence.

Wed, 10/29/2014 - 12:53 | 5390293 Duffy Duck
Duffy Duck's picture

The username the phallic crusader has not been activated or is blocked.

 

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