Wednesday’s Fed minutes, from the July 29th FOMC meeting took markets by surprise, not only because the embargoed time was broken with the early release, but also because of the dovish stance taken by FOMC committee members. The release arrived contrary to the hawkish Fed rhetoric that has been prevalent in the market place for the past several weeks, and investors have begun paring back their estimates for a Sep hike.
The minutes showed that there seems to be a divided Fed, with no concrete plans for the timing of the first hike. The Fed expressed concerns over growth and has acknowledged that troubles in China may affect the outlook at home, “several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook”. These comments were in response to the weak Chinese GDP print as well as the recent weakness in the Chinese stock market.
It should be noted that, at the time when the minutes were recorded, China had not yet initiated their aggressive monetary policy action to devalue the Yuan, nor had they released the bevy of weak Chinese economic data from last week. Since then, the Fed committee members may have adjusted their outlooks. It may be some time before the China growth story comes back online, as the policy action-reaction lag works its way through the global economy. As a result of the policy action undertaken by China and the consistently weak Chinese economic data that has come out since the last Fed meeting, it appears that the Fed’s China concerns may have worsened. This may be a factor for the hawks and doves of the FOMC to consider as they time the first rate lift-off and plan for the pace of policy normalization.
The Fed, in the Minutes release, also expressed some concerns domestically, as they nodded to soft business investment and an uncertain path for wage growth. Members of the committee took a wait-and-see tone during the last meeting and the minutes showed that, “Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range.”
Since the July Fed meeting, a majority of US economic releases have been soft. The advanced reading of GDP q/q arrived at 2.3% vs 2.6% (exp), ISM manufacturing arrived below expectations at 52.7 vs 53.6 (exp), and Non-Farm Payrolls came in slightly below expectations at 215K vs 220K (exp) with the unemployment rate in line at 5.3%. Though the employment report was offside by 5K, it was taken as a sign that the solid pace of growth in labor markets is intact. Core retail sales arrived as expected at 0.4% m/m. ISM non-manufacturing was above expectation at 60.3 vs 56.3, a wide upbeat. Inflation numbers since the last Fed meeting have edged slightly higher but remain firmly under the Fed’s 2.0% threshold with PCE Core 1.3% vs 1.2% y/y, PPI Core 0.6% vs 0.5% y/y, CPI Core 1.8% inline. All in all, the incoming data that the Fed has been eagerly awaiting to help gauge their policy path have not tilted overwhelmingly in one direction or the other to cement policy action in Sep.
Markets continued to adjust to the incoming data post the Fed minutes. The S&P index is offside 83 handles trading 2017 from 2100 at the beginning of the week. Crude oil has continued to tumble, trading just below $41.00 from $42.70, as China growth tensions mount. The USD index ticked lower to 95.7 from 96.9 in line with the dovish outlook presented this week. Safe haven flows are present amidst the uncertainty, evidenced by the 30yr US bond up over two full points at $160-09 from $158-03, and gold is testing highs at $1158 from $1112.
The Eurodollar strip has bull-flattened as traders pare back the probability of a Sep rate lift-off. Currently the Fed Funds Futures are pricing in just under a coin-flip odds at 44%, for a 25bps hike in Sep. The odds have wavered, reaching as low as 35% during post Fed minute knee-jerk in the short end of the curve.
Markets will continue to eye Fed speak and economic data as it comes in over the next 4 weeks, until the Sep 17th Fed Meeting. The Jackson Hole Symposium, August Payrolls, ISM releases, several housing figures, and further news from China will be eagerly watched to help markets develop a clearer view of the Fed’s most likely target for the first rate hike and for the interest rate policy glide path to will accompany it. While this week’s FOMC minutes and the generally soft trend in economic data have certainly sent echoes of dovishness through the markets, it is important to remember that the Fed has been very clear that every policy meeting in the near term is “live”, in other words a likely candidate for the first hike. However, some real issues have been uncovered this week and while they may not cause the Fed to wavier off their path in Sep, If the major themes from this week continue, it may become a major factor that could potentially result in a gentler pace in the Fed’s planned policy path.
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