FOMC Meeting: Fed's no-calendar version of statement is dovish by default

Outlook:

The Fed’s Statement today is taking on the power of the nonfarm payrolls num-ber (we get the April NFP next Friday). If the Statement is dovish and takes June off the table, the ultimate dovish version, dollar-sellers will be vindicated. After a bounce, the dollar will resume its decline.

If the Fed mentions June as still a likely candidate, the ultimate hawkish version, dollar-buyers will rush out of the bushes and we will get a bounce that turns into an enormous spike. We will get a Statement bounce no matter which version the Fed delivers—it’s only a question of degree.

The most likely outcome is no mention of specific dates—the Fed is trying to wean us off the calendar—so everyone is left trying to read the data the way the Fed is presumed to read the data. The no-calendar version is dovish by default because we all think data is weak. We also all think the Fed is more afraid of making a mistake (and having to reverse) than any other policy goal, including teaching the bond gang a lesson. Therefore, unless the Fed surprises, two of the three scenarios are net dovish. No wonder the dollar is on the defensive.

The WSJ gives us one of those tiresome lists (“5 things to watch”). In the case of the Fed statement, we should watch GDP, consumer behavior and business investment, the effect of oil and the dollar, and in-flation. The WSJ provides a dandy chart of inflation that shows us where we stand—judging from this one metric alone, we are not close to a rate hike.

Separately, today the NYT reviews the case for raising the inflation target from 2% to some higher num-ber, like 4%. That would save the Fed’s bacon. We say it would make the Fed look more cowardly than it already looks and just confuse markets.

Meanwhile, European inflation expectations have turned a corner. This is a bizarre outcome, since the ECB is considered far more stringent on inflation than the Fed, and presumably a function of faith that QE is going to work really, really well. Funny, QE did not produce that effect in the US, aside from the doom-and-gloom lunatic fringe who saw money supply expanding and yelled “fire,” forgetting about the multiplier effect going negative. When analysts are projecting a rosy future for the eurozone economy based on a tiny gain in private sector credit (0.01%), the bias is outrageous. It makes you want to shout “negative yields! Negative yields!”

We had been saying that 1.1000 was a strong resistance area and this is likely to be proved wrong. The next higher target we can see on the daily chart is 1.1531 from Feb 3. It’s a pity that Tsipras replacing Varoufakis will be mistaken for inspiring the euro rise when it’s really a coincidence. (We may just as well label the 3-week dollar low with “riots in Baltimore.”)

Greece still needs a third bailout as Dijsselbloem himself is saying and it’s a mystery why this is not a euro-negative. As we are wont to complain, the FX market treats the dollar unfairly. At some point, the yield advantage has to favor the dollar—doesn’t it? And the typically more robust US economy has to deliver inflation faster than in Europe. But we have seen traders thumb their noses at grand macro analy-sis before, usually on the basis of adjusting positions, which certainly seems to be happening this week. One thing is for sure—volatility is probably going to be horrendous. Retail traders should not be betting on this one.