Today’s FOMC Meeting has the potential of setting the market trend for the rest of the year, especially considering how the market has been accustomed to Fed handout in the past few months… However, if we’ve learned anything from the latest testimonies by chief Bernanke, it is just two words – “not yet,“ although we certainly can’t stop the market from dreaming…
Here are what some analysts are saying in regards to QE3:
Citibank: Don’t expect the Fed to make a big policy move ahead of the U.S. presidential election in November, says strategist Steven Englander. Although 80,000 added jobs is a “bad number,” it doesn’t constitute a “smoking gun,” Englander notes. “If this were June 2013, there would be much more anticipation of more quantitative easing.”
Barclays: In Barclays’ view, the jobs report is not weak enough to spur Fed action at the next FOMC meeting in August. Barclays notes the Fed is more likely to take action at the September meeting.
ING: While the nonfarm payrolls number is disappointing, it is not “cataclysmic” enough to get the Fed to embark on QE3, says economist Rob Carnell. He notes that average hourly earnings rose 0.3% month-over-month in June, the fastest pace since February.
With regards to Fed offcials, here are some of their latest comments:
- (US) Fed’s Raskin: Expects to talk about QE3 at the next FOMC meeting; Low interest rates create the potential for financial market instability.
- (US) US Fed’s Williams (voter, dovish) sees little progress in dealing with high unemployment before 2014 without further policy easing - He suggested purchasing mortgage-backed securities vs treasuries would have a stronger effect on financial conditions, if the Fed reserve decided on an additional round of QE.
- (US) Fed’s Bernanke: Reiterates tools include communication about forward guidance; may have to consider additional steps as evaluation of whether the loss of momentum in the economy is enduring.
- (US) Fed’s Bernanke: Continuing to disuss various tools but have not come to a specific choice on easing tools.
- (US) Fed’s Bernanke: QE and Operation twist have been effective in impacting rates and the stock market. Reiterates QE programs should not be used ‘lightly,’ but still have some capacity to support the economy.
So here’s the forecast and the schedule rate decision/FOMC Statement:
2:15pm US FOMC Interest Rate Forecast 0.25% Previous 0.25%
I’d recommend to use the Recommended Pairs from above as they are based on my CSM, which should provide the best combination of currency pairs to trade based on better/worse news… of course, you can also trade the default pair: EURUSD.
Outlook Score
Outlook score is derived from market sentiment, focus, and economic indicators for the currency. It represents the long-term trend of the currency and its market perception. In short, a strong Outlook Score means more long-term demand for the currency, and a weak Outlook Score is the opposite.
The Analysis:
As far as the FOMC statement, I’d expect minimal changes in today’s release compared to previous Statement:
Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
I’ll be looking for along the same lines of language acknowledging slow growth in employment, and look for any changes on inflation expectations.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
I’d focus on the phrase “and then to pick up very gradually” and “significant downside risks to the economic outlook” as the word “very” was added in the last statement as a message of Fed’s current assessment in the economic recovery, if the Fed takes the whole phrase about recovery out, it would bring some doom and gloom’er back to the market for safe-haven flows… The other phrase, the use of the word “significant” has been the focus and we’ll continue to monitor it. If “significant” is changed to “moderate” then it is a good sign for risk appetite; on the other hand, if it is changed to “extreme,” then it is good for risk aversion…
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
I expect no real changes to the paragraph above, and if the Fed changes the period to 2015 and beyond, expect market to react as it would mean that the Fed is doubting the recovery…
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
I believe the above paragraphs are not going to be changed much as I don’t expect new measures to be launched. Bernanke could extend the forward guidance and operation twist, but any other significant stimulus would not make sense as the Feds didn’t act when NFP was at 69K, why would they act now that the NFP is at 80K? In the very unlikely scenario that the Feds announces new measures, we should see some strong sell-offs in the USD…