I guess this FED meeting is one of the “easier” ones in some respect BUT at the same time still open to disappointment BUT that only due to the high expectations that we might have… BUT let’s look into this in more detail, as I could still see Buy the rumour, Buy the FACT, maybe not instant but in the many weeks to come.
I guess it is hardly a secret that the FED will announce an end to Taper as early as end of Q1 2022, this is pretty much priced and anything less than that, would be a surprise and would be dovish.
All about the dot plot we might say and probably that is true…. Will the FED, which was very cautious to talk about a time lag between end of Taper and start of hikes, really confirm at least 2 hikes for 2022. I feel they will and in some ways, it would NOT be wrong to shift gear to actually even call for 3 hikes…. No idea if they are actually as brave as that, in light of the Omicron variant… BUT the FED is under pressure now from all sides.
The CPI does make big headlines in the U.S. and all for the wrong reasons… this is NO longer just about Financial Markets, this is also becoming a discussion around the social aspect of CPI and the diminishing disposable income and of course the idea that the lower end of the income spectrum will suffer the most with the increase in prices just about everywhere……. I think the FED may be able to talk about Omicron BUT in terms of policy, they just have to take a gamble.
The FED will have to try and get ahead of the curve, even if it is just verbal and lip service… easier to be very hawkish this week and then paddle back early 2022 , than to miss the opportunity to be bold and brave on Wednesday.
As I have said a few times in recent months, the FED has to buy insurance… and nothing much is lost if they are going to be very hawkish at this meeting and if Omicron really creates bigger issues in Q1 2022, it is a lot easier to back paddle while everybody sees WHY they back paddle than to back paddle before we actually know a lot more about the Variant. We might all agree that in terms of severity, it indeed seems less…. BUT of course the fact that it is a lot more contagious than Delta, make it a challenge for the health system an some measures might be needed in the economy BUT I do NOT think that the US would move back to full lock down… in the light of that (not that I am a Scientist, just what I read)… I would think that the FED has to ignore Omicron at this point… BUT be hawkish and then we change the word “transitory” to a new word…. A C word…. “conditional”
I expect a very hawkish FED… and the only hedge for the FED is the word “conditional” (meaning, in case the Variant gets worse)… but other than that… full steam… the pressure is large now from all sides and no place to hide… and as I also said before…. Powell is neither a Dove nor a Hawk.. he is pragmatic.
His pragmatism kept him on the dovish side all this time… (too long as some might argue)… and he is now shifting to the new job at hand, which is to get on top of CPI… and before long… he will be seen as a HAWK on the cheat sheet… it would NOT surprise me
All this being said… the USD has seen a lift since Fed Vice Chair Clarida upped the ante… and continued when FED Powell was renominated…. And I see no change in the direction of the USD for the next few months…. The USD will stay strong into 2022… and definitely the first quarter BUT would not be surprised if longer….. in the very short term, post meeting… whether some feel that it is a buy rumour sell fact…. As they hardly can out hawk themselves… maybe … BUT I WOULD NOT SPEND 1 MINUTE TO THINK ABOUT USD SELL LEVELS… do NOT miss it again… BUY any dip in the USD… and keep core USD longs.
The Market has been bearish USD most of 2021… while we were bullish USD all of 2021…. And I will continue to be bullish into 2022 at least until mid-2022 before we re asses what other Central Banks do and that could easily mean the USD will stay bid most of 2022 BUT that might just be a tad too early… in end of 2020, I had no doubt that the USD is good for all 2021… for 2022… we have to look at the broader picture and see whether the ECB wakes up one day or not during 2022.
Speaking of ECB…. I guess with partial lock downs or full lockdowns in some European countries… Lagarde has all the excuses she needs to postpone any decision on the APP and kick that into spring 2022…. The PEPP will probably run out in Q 1 as expected but there were already plenty of sources stories for alternative programs if they were needed…. We can expect a dull ECB and one that is more on the dovish side… the biggest risk during the ECB meeting will come from the ECB press conference… as I guess you all know… I am NOT a big fan of Mrs Lagarde and I would think that there will be 1 question that she will know that she will get asked…. Given the FED has retired the word Transitory… this will be for sure a question on what the ECB makes of that…. given she isn’t always the best with words… the answer to that question could be the biggest risk for a potential upset on the Press conference… BUT she had time since the Powell testimony to expect that question and I hope some of the real Central Bankers inside the ECB did prep her enough NOT to stumble on that question.
BOE also this week… I guess we have priced out a lot of the 15bp hike that was expected… with PM Johnson talking about the risk of a Omicron tsunami, the BOE might be advised NOT to hike rates in December and kick it into early 2022…. Also not to forget… the UK is dealing with the double whammy of Covid and Brexit, so would suggest if there is 1 Central Bank that should be cautious on normalising policy too early, it be the BOE.
All that being said… I was a USD bull all year, I remain a USD bull, I remain long USD and I look to buy any dip that the market provides post this weeks FED meeting and will wait for the year end rally of the USD as well as the rally into next year with the FED leading the policy normalisation.
In terms of equities… maybe time for equities to realise that a few things aren’t yet so clear…. maybe time to realise that Rates could go up a lot faster than expected… I have been a rally seller in recent weeks and continue to do just that…. I do NOT expect a big slump in equities BUT definitely nothing wrong for some re-pricing of some 10-15 %
Good luck this week… the last full week of 2021… with the FOMC, BOE, ECB, SNB, BOJ , Norges Bank just to name a few
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