What To Expect From FOMC Minutes? - BofA, CS, Barclays, & Others

The following are the expectations from today's FOMC minutes from the June meeting as provided by the economists at Bank of America Merrill Lynch, Credit Suisse, BNP Paribas, Barclays Capital, and other leading banks.

BofA: As always, there is a risk that the minutes sound more hawkish than the statement or Yellen’s press conference. The upward drift in the dot plot adds to that risk, and markets will be sensitive to any indications that the Fed may consider accelerating its liftoff, particularly after the June employment report. Further discussion about the exit strategy and policy normalization process is probable — but details may be thin at this meeting. We expect an updated statement of exit strategy principles later this year. Another potential topic of discussion would be how to improve the communication of policy, particularly ways to revamp the dot plot. Note that three new voters participated at this meeting: Stanley Fischer and Lael Brainard as governors, and Loretta Mester as Cleveland Fed president. However, Brainard’s swearing in was too late for her to submit forecasts for the SEP. (Thus, there will be 17 participants but only 16 projections.) The emergence of a very low set of policy forecasts at the June meeting is one puzzle that the market will seek clues about — but we doubt the mystery dove will be unmasked by the minutes.

CS: The hawkish tone of the Fed statement and economic projections – wherein the economic language and outlook was somewhat improved – was tempered by Chair Yellen’s subsequent press briefing where she described the inflation data as noisy. Any discussion on an exit strategy will be closely watched, as well as discussion around conflicting signals sent by a more buoyant labor market, but disappointing GDP figures. Treasury will auction $21bn 10y notes in the second reopening of the May issue today. The extent to which there is little mention of inflation or language similar to Yellen’s in the minutes may further the idea that the Fed could wind up falling behind the curve on inflation, resulting in a temporary overshoot. We favor reds-greens conditional bear steepeners as well as 3s5s10s Treasury fly tighteners.

BNPP: For all of the previous Fed meetings this year the reaction to the minutes has been the opposite of the announcement. This suggests USD could draw some encouragement from the tone of the broader policy discussion in contrast to the dovish-leaning comments by Fed Chair Yellen at the press-conference. To the extent that important data has been released since the meeting, Yellen’s semi-annual Congressional testimony now scheduled for July 15 should be an important potential venue for signalling any changes to the Fed’s thinking ahead of the next formal policy meeting. Although the USD’s post-payrolls struggles have clearly been disappointing for the bulls, we see few reasons to give up on the long view against currencies that are even cheaper from the funding perspective, such as EUR and JPY.

Barclays: The June FOMC minutes (Wednesday) will provide more color behind the Fed’s thinking on the eventual rate hike. Discussions behind upward revisions in fed funds forecast in SEP and the ongoing debate on exit strategy principles are particularly relevant since market pricing of rate hikes (end-2015 at 0.74%, end-2016 at 1.75%) remains inconsistent with the FOMC’s forecast (end-2015 median at 1.13%, end-2016 at 2.50%). Hence, there is a scope for upward adjustments in the market’s forecast, which should lead to selloff in the belly of the UST curve and strengthening of the USD, in our view (see USD: When inflation doves cry, 27 June 2014). The USD rebounded this week on stronger-than-expected US employment numbers. However, for a broad and sustained USD rally, we will likely need stronger US inflation prints to raise Fed rate hike expectations.

Credit Agricole: June FOMC minutes: differing views on labour market slack, inflation pressures, timing of the rate lift-off and reasons for a lower equilibrium Fed funds rate will be of interest. The FOMC statement and updated Summary of Economic Projections (SEP) were roughly in line with our expectations, and the Fed Chair’s press conference made the case for keeping rates low for a considerable time after QE ends in Q4. The meeting participants’ discussion about the outlook for growth is likely to confirm SEP estimates for a rebound in Q2 real GDP growth followed by above-trend growth into 2015, reflecting rising job growth, an accommodative monetary policy and improved household balance sheets. The discussion on labour market developments is likely to highlight the different views on the amount of slack in the job market, given the faster-than-expected decline in the unemployment rate. We believe that the majority view will see ample slack and lack of wage pressures as limiting any near-term inflationary impulse. However, the recent rise in inflation measures (core PCE running at 1.5% YoY and top-line CPI at 2.1%) may raise concerns about inflation expectations drifting higher, despite the Chair’s comment about the “statistical noise” in the inflation data.

Danske: The main event is the release of the FOMC minutes from the 17-18 June meeting, when policy makers trimmed the bond purchase programme by USD10bn for the fifth consecutive gathering. The statement from the meeting was judged as relatively dovish, albeit the projection for the leading Fed funds rate was revised slightly higher. In particular, Janet Yellen downplayed the recent increase in inflation at the press briefing and it will be interesting to see whether this view is broadly shared by other FOMC members.

BTMU: The release of the latest FOMC minutes will be in focus in the US trading session although their impact on the US dollar should be relatively neutral unless they contain any significant surprises.


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