"Cherry Picking is defined by the Oxford dictionary as "Selectively choosing (the most beneficial or profitable items, opportunities etc.) from what is available".
The minutes are out and the cherries have been picked. The Federal Open Market Committee minutes are hawkish! Or are they? The US equity markets don't think so and neither does Canada's S&P/TSX index. They are all modestly higher on the day. However, the FX markets appear to have bought into the hawkish view point as the USD has popped higher against the majors.
Hawks like labour discussion
The hawks have keyed in on the more detailed discussion of the Labour market and the following sentence from the FOMC minutes: "Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run. is cited as evidence that the Committee has adopted a more hawkish stance."
Doves also like labour discussion
The small minority that see the minutes as slightly doveish to neutral at best argue that the following paragraph greatly dilutes the tone of the above statement. "However, many participants continued to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated by the difference between the unemployment rate and estimates of its longer-run normal level. These participants cited, for example, the still-elevated levels of long-term unemployment and workers employed part time for economic reasons as well as low labor force participation."
The labour market may be improving but the committee remains just as concerned about the labour gap as they did previously.
When the stars and the planets are aligned
Another paragraph that has garnered a lot of attention from the hawkish camp is
"With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term".
The hawks seem to think that this statement is hawkish when in reality it has been said before - rates will rise when the the incoming data supports an increase.
No rate hike before its time
The doves took note of the following paragraph which essentially nullified the concerns raised above. "However, most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation. In particular, although participants generally saw the drop in real GDP in the first quarter as transitory, some noted that it increased uncertainty about the outlook, and they were looking to additional data on production, spending, and labor market developments to shed light on the underlying pace of economic growth."
Buy the rumour, sell the fact
It is readily apparent that today's FOMC minutes have been deemed hawkish by FX traders as the USD is quite bid against the majors. The question that arises is: "Does the degree of hawkishness implied by the minutes warrant further gains in the green back?" In the past week, USDJPY has risen over 1.4%, while EURUSD has shed nearly 0.8%. Arguably, the bulk of those gains were on anticipation of hawkish minutes.
But what has really changed? Nothing! US interest rates are probably increasing in the second quarter of 2015. Today's minutes provided no more evidence of a rate hike moving forward than what was reported last month. Some believe that the fact that the Committee members are actually discussing the timing of a rate hike is in itself hawkish. Why? It is part of the job description.
Will Yellen put the dollar bulls in a Jackson Hole?
Janet Yellen is well known for preferring the more detailed Job Openings and Labour Turnover Survey (JOLTS) to the US nonfarm payrolls report as a barometer for the health of the US employment market. Her keynote address at the Jackson Hole symposium is entitled "Labour Markets". She has been vocal in her concern that part time workers can't find full time jobs.
Today's FOMC minutes made reference to many participants "continuing to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated by the difference between the unemployment rate and estimates of its longer-run normal level".
Was Ms Yellen one of the participants? If her speech in anyway indicates that managing the hard-to-quantify, "employment slack" is a key factor in determining the timing of a rate hike, the USD is likely to give back a lot of this week's gains.
Recap
Today's FOMC minutes have empowered US dollar bulls who believe that US rate hikes are coming sooner rather than later. They are conveniently ignoring the FOMC's stated concerns about labour market slack and the Committee's stated goal of seeing more evidence that the recovery is sustainable. No one is denying that US rates are going up but the dollar bulls may have gotten ahead of themselves and are exposed to a correction. A doveish perception of Ms Yellen's Jackson Hole speech may be the catalyst.