The Sellside Reacts: "Fed On Autopilot" To June Hike, But Dollar Bulls May Be Disappointed

As expected, there were no fireworks in the Fed statement which on balance was rather hawkish thanks to the Fed's explicit assurance that recent weak data was "transitory" (we wonder how the "data-dependent" Fed will react if the weakness is not transitory). And as the Wall Street reactions start trickling in, the consensus is that the Fed remains on "autopilot" until June, when it will hike once again.

And while the dollar is stronger, Citi's Todd Elmer made an interesting observation, namely that "if anything the knee-jerk response to the statement saw USD selling. While this very modest move has since unwound, this suggests that market lean was not quite as dovish as recent softer data flow might suggest. The forward looking implications are two-fold: 1) It may take a much more significant shift in signals from the Fed either on rates or the balance sheet to see investors add to expected tightening in the quarters ahead. With limited incentive for the Fed to induce such a move, we doubt that this factor will offer USD much support for the time being. 2) This may denote a more hawkish lean into the data later this week."

Citi's conclusion - the dollar may be prone for a selloff: "The elevated payrolls forecast is partly a function of presumed seasonality and payback, but insomuch as this points to investor willingness to shrug off recent weaker indicators, this points to potential for USD-negative disappointment"

First, here is Citi's Todd Elmer:

Fed on autopilot

 

Today’s policy statement is unlikely to drive many ripples in the market, so the likelihood is that we will continue to see broadly range bound trade until the heavier hitting events later this week. Specifically, speeches by Fed Vice-Chairman Fischer on monetary policy and other Fed officials, as well as the payrolls release are far more likely catalysts for moves in FX. The former provides more freedom for the Fed to offer nuanced shifts on forward guidance than is possible in the constrained policy statement, while the latter will be seen as a key marker on whether or not the recent soft patch in data flow is extending.

 

For the Fed’s part, the policy statement hits slightly hawkish notes. The expectation is that recent slowing will be ‘transitory’ and there is acknowledgement of improved labor data. This should reinforce the view that recent developments are unlikely to interrupt the Fed from its measured tightening, but provide little to prod the market to price in a faster pace of tightening beyond June. The forward guidance was unchanged. This means that pass through to FX is likely to be limited.

 

Indeed, if anything the knee-jerk response to the statement saw USD selling. While this very modest move has since unwound, this suggests that market lean was not quite as dovish as recent softer data flow might suggest. The forward looking implications are two-fold: 1) It may take a much more significant shift in signals from the Fed either on rates or the balance sheet to see investors add to expected tightening in the quarters ahead.

 

With limited incentive for the Fed to induce such a move, we doubt that this factor will offer USD much support for the time being. 2) This may denote a more hawkish lean into the data later this week. The elevated payrolls forecast is partly a function of presumed seasonality and payback, but insomuch as this points to investor willingness to shrug off recent weaker indicators, this points to potential for USD-negative disappointment. 

And BMO's Ian Lyngen:

FOMC statement shows committee is still viewing the economy as “just fine” and a rate hike in June is still possible, BMO strategist Ian Lyngen writes in note. 

 

Changes from previous statement in line with expectations

 

“Treasuries are only modestly weaker in the wake of the Fed, in line with the interpretation that very little was said and the big story of the day remains the lower odds of an ultra-long bond”

Finally, here's Goldman's Jan Hatzius:

1. The FOMC maintained the funds rate target range at 0.75-1 percent at its May meeting, as widely expected. The post-meeting statement acknowledged but downplayed weak GDP growth in Q1, noting that it expects the slowdown to be “transitory.” Similarly, the statement downgraded the description of consumption growth, noting that it “rose only modestly,” but noted that the fundamentals “remained solid.” In addition, the statement upgraded the description of business investment mildly. On the labor market, the FOMC looked through recent volatility to note that job gains have been solid “on average” and also noted the decline in the unemployment rate. On inflation, the statement acknowledged the decline in consumer prices in March, but noted that headline inflation was “running” instead of “moving” close to the 2% target on a 12-month basis.

 

2. The statement made no change to the description of the balance of risks, which remained “roughly balanced,” or the stance of monetary policy, which remained “accommodative.” Finally, the statement made no changes to the discussion of balance sheet policy. There were no dissents.