- Fed provides no clarity to investors
- Fed offers a darker view on US economy for 2015
- No consensus on the number of rate hikes for this year
- Investors unwinding dollar positions and market complacency
The U.S dollar bull has being seeing red ever since the conclusion of yesterday’s FOMC meeting. The lack of clarity from the Fed, which the market has been interpreting as a dovish signal, is putting the dollar under pressure across the board and allowing several of the G10 currencies to print multi-month outright highs.
The EUR trades above €1.14 heading stateside, edging ever higher ahead of today’s important Eurogroup meeting. The lull in Greek headline rhetoric is pressuring some of the weaker short EUR positions. Sterling has managed to print a seven-month high £1.5910 and is threatening to take on the psychological £1.60 handle after this week’s stronger than expected U.K wage growth and retail sales numbers for May. A pause in the rate divergence argument has lifted Yen below ¥122.56. Despite SNB’s Jordan, in his post rate decision press conference where rates were held steady, reiterating that the CHF is clearly overvalued is not weakening that currency. The market continues to value the CHF ($0.9165) as safe-haven due to the situation in Greece.
The USD was never going to find much support after the FOMC lowered growth forecasts over the rest of 2015 and also revised down their interest rate projections for 2016 and 2017 by -25bp. Perhaps more importantly, the committee offered no consensus on the number of rate increases for this year. A large percentage of the market had been expecting the Fed to clearly signpost the timing of rate liftoff stateside.
The Fed is Consistent
With Ms. Yellen and company again successfully muddying the timing has pressured those investors who had been expecting a stronger commitment by the Fed for a September rate increase to unwind or pare back on their dollar long positions. Technically, the dollars rally has stalled since mid-March mostly on uncertainty over the Fed’s intentions and this weeks meeting should confirm that investors can expect heightened market volatility across all asset classes even more so going forward. As well as unwinding dollar positions, investors have had to unwind their own market complacency factor.
Yesterday’s Fed statement should be eyed as short-term negative for the dollar, but a long-term plus. U.S rates will eventually end higher, but investors must now adjust to the fact that they are to get there more slowly than previously anticipated.
Most of the changes were, as expected, in the first paragraph on economic conditions, and they represented an upgrade to the downbeat April statement:
- The statement noted that activity was “expanding moderately after having changed little during the first quarter.” That’s better than April, when “economic growth slowed during the winter months…”
- Similarly, the labor market was upgraded as the statement noted that the “pace of job gains picked up” and other labor market data “suggests that the underutilization of labor resources diminished somewhat.” Again, that’s better than April, when the Fed, on the heels of a weak March payrolls report, noted that the “pace of job gains moderated” and other labor market indicators suggested that “underutilization of labor resources was little changed.”
- Consumer spending was now said to be “moderate” versus having “declined” in the April statement. Housing was upgrad, with the statement now saying that “the housing sector has shown some improvement” versus “the recovery in the housing sector remained slow.”
- Business fixed investment and net exports “stayed soft” which is only a marginal upgrade to net exports, which were said to have “declined” in April.
- The language on inflation was left largely unchanged, although the June statement did note that “energy prices appear to have stabilized” and there was also a reference in the second paragraph to the transitory effects of “earlier” declines in energy prices.
FOMC: Summary of Economic Projections
- Real GDP for 2015 is lowered to +1.8%-2.0% from the March projection of +2.3%-2.7% Little change in 2016 and 2017 – long-run estimate of +2.0%-2.3% remains.
- The 2015 unemployment rate projection was boosted from 5.0%-5.2% in March to 5.2%-5.3%. The 2015 and 2016 projections were little changed, and the long run remained at 5%-5.2%.
- Headline PCE inflation rate of +0.6%-0.8% was left unchanged fro this year and little change to 2016 0r 2017.
Analysis of Dot Plot Projections:
- Median stays at +0.625% year-end (implying two-hikes).
- However, there is a shift in the number of dots at +0.375% (implying one-hike). It rises from one to five people, indicating that four individuals dropped down from a higher level.
- The market has interpreted that a September lift off remains up in the air, similar to the 50-50 coin toss that fixed income traders had been pricing in prior to this weeks meeting.
- A dovish signal – There are now five officials looking for one hike versus one previously and five looking for two hikes compared to seven previously.