Fed Leaves Rates Unchanged & June Open For Hike

Following our pre-FOMC primer on what to expect during today's April Fed event, the Fed has once again left the Federal Funds target rate unchanged at 0.25% - 0.50%. We managed to cover the entire event live on our Facebook page, and will therefore be posting content from that venue along with some supplementary comments.

  "The aftermath of April's FOMC snoozer. Interestingly, despite all the intraday volatility, crude oil is outperforming every asset class by leaps and bounds, soaring right out of the hole after an initial dip.    Fed funds futures are now pricing in a 23.5% chance (up from 21.6% pre-FOMC) of a June rate hike. Rate hike odds rise rather steeply thereafter for the months of July, September, November, and December, respectively."    Business Of Finance on Facebook, 28 April 2016

"The aftermath of April's FOMC snoozer. Interestingly, despite all the intraday volatility, crude oil is outperforming every asset class by leaps and bounds, soaring right out of the hole after an initial dip.

Fed funds futures are now pricing in a 23.5% chance (up from 21.6% pre-FOMC) of a June rate hike. Rate hike odds rise rather steeply thereafter for the months of July, September, November, and December, respectively."

Business Of Finance on Facebook, 28 April 2016

Here are some bulletin headlines from the April FOMC event immediately after the statement's release:

  • FED REMOVES REFERENCE TO GLOBAL EVENTS POSING RISKS TO OUTLOOK
  • FED SAYS LABOR MARKET IMPROVED EVEN AMID SIGNS OF SLOWER GROWTH
  • FED REPEATS ECONOMIC SITUATION WARRANTS ONLY GRADUAL RATE HIKES
  • FED SAYS HOUSING SECTOR IMPROVED FURTHER SINCE START OF YEAR
  • FED TO WATCH INFLATION, GLOBAL, FINANCIAL DEVELOPMENTS CLOSELY
  • FED: INFLATION BELOW TARGET DUE TO CHEAPER NON-ENERGY IMPORTS
  • FED SEES MODERATE GROWTH, STRENGTHENING LABOR MARKET AHEAD
  • FED REPEATS ECONOMIC SITUATION WARRANTS ONLY GRADUAL RATE HIKES

This is precisely what we talked about in out last snippet, that the Fed will rather err on the side of caution than to tighten prematurely and risk having to reverse its path of policy actions — which would not only deal great harm to both the actual economy and global financial markets, but also eviscerate the last remaining bits of credibility the Washington-based entity has left.

  "The reaction across stocks, USD, gold, and U.S. treasuries post a quasi-dovish FOMC, or what we call a "hawkishly-dovish" statement.    Equities are higher post event as risk flows turn positive after the initial knee jerk lower. SPX is attacking the week's highs as we go to print.    The U.S. dollar is weaker post event after initially ramping, again on a knee jerk. It seems market participants view the April statement as more bearish the dollar than bullish, despite FOMC having removed the emphasis on negative global risks, and reasserting that the labor market is on track to reaching full employment.    Bonds are higher (yields lower) post event, and are perhaps the single most directional asset class here other than equities. Markets clearly view the statement as dovish — Bullish for equites and bonds, bearish for dollar.    And lastly, Gold remains confused after dumping on a knee jerk, then rallying to unchanged, then dumping again before somewhat stabilizing slightly lower pre-FOMC. We note that silver is trading much stronger than gold is."    Business Of Finance on Facebook, 28 April 2016

"The reaction across stocks, USD, gold, and U.S. treasuries post a quasi-dovish FOMC, or what we call a "hawkishly-dovish" statement.

Equities are higher post event as risk flows turn positive after the initial knee jerk lower. SPX is attacking the week's highs as we go to print.

The U.S. dollar is weaker post event after initially ramping, again on a knee jerk. It seems market participants view the April statement as more bearish the dollar than bullish, despite FOMC having removed the emphasis on negative global risks, and reasserting that the labor market is on track to reaching full employment.

Bonds are higher (yields lower) post event, and are perhaps the single most directional asset class here other than equities. Markets clearly view the statement as dovish — Bullish for equites and bonds, bearish for dollar.

And lastly, Gold remains confused after dumping on a knee jerk, then rallying to unchanged, then dumping again before somewhat stabilizing slightly lower pre-FOMC. We note that silver is trading much stronger than gold is."

Business Of Finance on Facebook, 28 April 2016

By removing emphasis on negative external risks (i.e. volatility in global financial markets, China, and oil prices) and placing new weight on monitoring global developments, the Fed is essentially hinting that while risks have indeed subsided, FOMC members will nonetheless be sensitive to negative surprises across the pond and in Asia.

This essentially shifts some of the attention away from the domestic economy, which the Fed has acknowledged to be on the slow path of growth, and shines more light on other factors, which may or may not include oil prices, geopolitical stability (or lack thereoff), monetary policies of other major central banks, and the like.

  "Fun fact: The number of words in each respective FOMC statement since the start of 2015 (end of QE3) has averaged at about 560, and has remained so for at least 11 statements since.    Is the Fed running out of things to talk about?"    Business Of Finance on Facebook, 28 April 2016

"Fun fact: The number of words in each respective FOMC statement since the start of 2015 (end of QE3) has averaged at about 560, and has remained so for at least 11 statements since.

Is the Fed running out of things to talk about?"

Business Of Finance on Facebook, 28 April 2016

This seems to be a sleek trick from the Fed's sleeve; allowing it to maintain its "hawkishly-dovish" posture whilst awaiting more positive developments domestically. Developments such as the thawing of disinflationary headwinds brought from low oil prices, which are of course lagging in nature, and (secular?) weakness in the manufacturing industry.

The market now expects at least a 25% likelihood that the Fed will hike rates during their 15 June meeting, once again back loading the path of tightening.

  "Time to be wary about being short the dollar? Perhaps.    Technically, we are at a key support area on the DXY (dollar index), which has yet to be cleared on the downside.    Adding to that, speculative positioning has turned net short USD for the first time since August 2014. In other words, speculative (momentum chasing) money is the most short USD since almost 2 years ago. Much of dollar weakness has been the result of USD long liquidation as seen from positioning data. Will the opposite be true now? Is a short squeeze imminent?    The answer may lie with today's April FOMC statement due in 2 hours."    Business Of Finance on Facebook, 28 April 2016

"Time to be wary about being short the dollar? Perhaps.

Technically, we are at a key support area on the DXY (dollar index), which has yet to be cleared on the downside.

Adding to that, speculative positioning has turned net short USD for the first time since August 2014. In other words, speculative (momentum chasing) money is the most short USD since almost 2 years ago. Much of dollar weakness has been the result of USD long liquidation as seen from positioning data. Will the opposite be true now? Is a short squeeze imminent?

The answer may lie with today's April FOMC statement due in 2 hours."

Business Of Finance on Facebook, 28 April 2016

We reckon that the Fed will not wish to wait beyond June to throw in its next interest rate hike, because the nation-wide Presidential Elections will be a key domestic issue come the second half of this year. The Fed will not wish to add more noise to the already busy event horizon that will befall Americans.

Other than what we've mentioned above, this statement was more or less a snoozer and came in mostly as expected. We maintain our current stance on the markets we track and trade.

Lastly, here's a succinct assessment from  Stone & McCarthy on today's statement:

Key Take-Aways:
  1. The April 27 statement downgraded economic activity, said it "slowed", but labor market conditions "improved further" and inflation still expected to rise toward 2% over the medium term.
  2. Removed language that "global economic and financial developments continue to pose risks".
  3. Kansas City Fed's Esther George dissented in favor of a rate hike.
The FOMC meeting statement of April 27 was downgraded its assessment of current economic activity as it "appears to have slowed", but overall the tone was for moderate expansion, further improvements in the labor market, and low inflation that is still expected to gradually return toward the 2% objective as "transitory effects of declines in energy and import prices dissipate". Inflation expectations "remain low", while survey-based measures of inflation compensation were "little changed, on balance".
Our read is that the key change in the statement is the removal of the language that said, "However, global economic and financial development continue to pose risks." While the FOMC will continue to "closely monitor inflation indicators and global economic and financial developments", the deletion suggested that FOMC participants are in consensus that impacts from global market turbulence will have a limited impact on the US, and that the US economy will remain resilient in the face of headwinds.
We think that this leaves the door open for a rate hike at the June 14-15 meeting provided the economic data remains about the same as at present, or improves. The forward guidance was unaltered. The statement said, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Kansas City Fed President Esther George dissented for a second meeting in a row. The statement said she "preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent".