My 2 Cents (Fed Preview)
https://macrobeat.co.uk/my-thoughts/f/my-2-cents-fed-preview-1
Hi all
Finally it is the time of possibly one of the more important and interesting FED meetings of the year…. Recent weeks have of course started to see the shift to more hawkish expectations… the Taper story has been well telegraphed and as we said for quite some time… Taper is on auto pilot…. And I have seen noting that would derail any form of taper announcement in this meeting… BUT that is about the only thing that is truly clear….
The market heads into the meeting on a clear hawkish outlook and that is probably where all the fine details will be that we have to look out and then try to figure out if that is what is consensus or if we can actually beat the current hawkish twist that is already out there.
TAPER
Let’s start here.. I guess that is the one that is the clearest of them all… we will get a Taper announcement tomorrow that will have some caveats or not…
-The size of taper seems pretty much still at 15 bio (10bio bonds and 5 MBS)
-Will taper start in November or December… a small degree of more hawkish or less hawkish
-Will we hear that they will reduce QE monthly or meeting by meeting… monthly means a Nov start would finish mid-2022 as they communicated.. a taper for meeting
By meeting would only get us to 90 bio by mid-2022 , assuming the size of the 15 bio stays the same…
-Will they communicate that the Monthly (or meeting) reduction is flexible in size…
I guess the market would think that we get a November start and a monthly reduction and that should be more or less the centre case and I would also agree with that BUT I can see the risk of a faster taper… and a FED that might want to be done a lot earlier than mid-2022 and that is where the really HAWKISH element would come from… I am not yet sure on how they would make that clear other than really spell it out and leave the impression that they will be done by LATEST mid-2022 but if all goes as expected, would not mind to be done earlier.. this would be really hawkish and personally my preferred scenario…
FASTER TAPER than expected is the real hawk here around the Taper topic.
Transitory
There has been quite some discussion out there, be it from Regional FED members as well as former FED members in the press… that they believe that “transitory” is on the way out…I do NOT believe that Powell has yet the courage to completely miss it from his speech… but we will get a watered down version of Transitory and an acknowledgement of rising inflation.
A watering down of Transitory is hawkish… if Transitory would be dropped completely, that would be super hawkish
Rate Lift off
This is probably the biggest debate…. By now, the market is pricing a full 25bp hike by July 2022.. which would be just 1 month post the end of Taper and if we remember, Powell has said all along, that Taper is one thing, rate lift of another and that there will be ample time between the two events…. If I remember correctly, when we had the last FED meeting we barely moved from pricing hikes for Q1 2023 towards Dec 2022.. so July 2022 is yet another quite steep slope to walk here… How will Powell communicate… will he push back the market pricing the same way RBA Lowe did last night (with 3 year yields dropping some 15bp)…or depending on the Taper signal (done earlier than mid-2022) allow enough time between taper and the first hike.
As Bullish as I am for the USD and a hawkish FED, I got to admit that it is probably hard to see that Powell will sign up to a July hike… and he will probably try to push that back… how strong would he push back.. .that is where the devil will be in the detail.
I am core long USD and have been for a while and I do NOT see a reason to change this into the FOMC but maybe there is no need to be limit long given we are still near the same levels in the DXY and the EURUSD as we have been for a while.
This will be far from an easy or clear cut FED meeting… we kind of know what we get… and still we do NOT quite know, how much the FED wants to turn on that hawkish screw….
Market pricing
I feel we are priced for a November taper… 15 bio per months finishing mid-2022
Should we see Taper start in December i/o November.. small USD dip
Should we see a hint of Taper to possibly finish ahead of time , we buy more USD’s
July 2022 sees a 25bp hike fully priced… risk for the FED meeting is that Powell is pushing back on the early rate lift of which would see the USD dip and we would take out the July hike and shift it back to either September or December 2022… what of course will also matter, how much does the market believe in what Powell has to say…
Last but not least… if the FED waters down “transitory” that is USD bullish…. If they would leave it out (not centre case) it would be a strong USD buy signal.
All in all… as I said NOT so clear cut but gut feel would tell me that the Dovish elements of the FED meeting would see a USD set back but not a big USD sell off while the hawkish surprises would see a very strong push higher in the USD, given technically we are just about in the right spot for a year end USD rally.
I am sorry that I cannot really deliver the clearest of guide for this FED meeting BUT most of the elements are in the wording more than in the action and that means we will have different opinions out there to what each element means…. Hence why maybe it isn’t the best idea to be fully positioned into the meeting and rather increase risk of we get our preferred outcome or managed open risk if that is NOT the case.
Personal opinion
I think the FED got the message, there is no more hiding… the FED will taper more aggressively than currently planned and will most likely balance that hawk out by pushing back on the July 2022 rate hike…. A balance of those two, I would still see net as USD bullish as the faster taper will keep the rate hike options open.
The risks for the FED meeting…no doubt that the market consensus is towards a hawkish meeting (which brings its usual risks) BUT the degree of hawkish is the core debate out there…
To sum it up
-We look for Taper start date.. Nov or Dec….. monthly or meeting by meeting
-We look out for if and if, how Powell pushed back on early rate hikes
-We look out for what kind of shape the “transitory” story gets… unchanged, watered down or dropped…
And I guess by the wording, you can already tell that this is a real fine tune, emotional type of meeting and your own conviction and believe… there will hardly be the easy BUY or SELL sign at this meeting. I have called for taper most of 2021 and I guess if the FED could turn back the clock, they would have started a lot earlier BUT here we are… they know they are a tad late and hence why I expect taper to finish before the current June 2022.
I wish you all good luck out there tomorrow.
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