Dovish FOMC minutes

Analysts at Nomura explained that despite Friday’s weak CPI inflation print, the dollar performed strongly in the first half of the week, aided by above-consensus retail sales numbers and hawkish comments from NY Fed Dudley suggesting that he would support a further hike in 2017 if the data warranted it.

Key Quotes:

"Nonetheless, these gains were reversed in part later in the week by dovish FOMC minutes and continued political turbulence in Washington.

Wednesday’s FOMC minutes showed continued uncertainty on inflation with ‘many participants’ seeing some likelihood inflation could remain below 2% for longer than currently expected, with risks tilted to the downside. Inflation prints between now and the December meeting remain highly important for the FOMC and the market.

There were also discussions on financial conditions, despite having increased rates three times since December, financial conditions have eased in the US. Finally, there was a continued consensus on balance-sheet reduction at September’s FOMC meeting.

Based on the minutes, and our expectations that the August CPI data will not contain another large downward surprise and that financial conditions do not change drastically, our economists’ maintain their call for a December rate hike.

President Trump has faced a challenging week in the White House. Meanwhile, the 29 September deadline Mnuchin has set for the debt ceiling bill to be passed approaches. Our economics and rates teams find that the risks of breaching the debt limit are lower than in 2011 and 2013, but slightly higher than in 2015. FX markets and FX vols tend not to react in the same way that Treasuries have ahead of debt ceiling limit breaches, and historically debt negotiations do not become serious until the closing bell gets much closer.

Tail risk hedges are unlikely to build during the August recess, but if discussions show signs of deadlock in September, then the market may begin to take notice."

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