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
- 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...
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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?
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Full Redline Statement below: