10 Jul 2014
FOMC minutes: Market shows dovish reaction - Nomura
FXStreet (Bali) - The market interpretation to Wednesday's FOMC minutes was a dovish one, notes the Team of US Economists at Nomura.
Key Quotes
"The market reaction points to a dovish minutes rather than a hawkish one, in stark contrast to what happened on the day where the prepared statement/SEP forecasts were leaning hawkish.The market reaction points to a dovish minutes rather than a hawkish one, in stark contrast to what happened on the day where the prepared statement/SEP forecasts were leaning hawkish. Yields backed up pre 2pm as the market, us included, had expected the minutes to expand on why the FOMC participants raised their dots among other things."
"The comments on the RRP are in line with the piece we wrote in April of how the Fed would raise rates (see link, while also staying cautious and looking to add more “design features” in fine-tuning the facility). The spread of 20bp is where RRP is now vs. IOER (when the program is in testing phase) so perhaps the Fed wants to keep it constant to allow for further flexibility. We think a spread of 10-15bp is more likely at first and in all fairness they could widen it as rates get further from the zero-bound."
"The real dovish comments revolve around the reinvestments: this is a critical piece for both the mortgage and UST markets. Now if the FOMC were to decide to allow the rolloffs to start before hiking, it would fall into the same trap as the ECB, which has synthetically tightened by letting its balance sheet contract (remember when QE1 came to an end and mortgages started prepaying, there was a tightening of FCI in the US as well)."
"The downplaying of inflation is relatively in line with our thoughts in that we expect some mean reversion to happen soon and wage inflation will take time to manifest itself in the numbers. We still like the trades we recommended earlier (see link) and as core view stick with lower terminal rate (via 5y5y) over time but that doesn't mean they won't rise sooner if things improve (we remain in the Q2 15 camp for the Fed‟s first hike)."
Key Quotes
"The market reaction points to a dovish minutes rather than a hawkish one, in stark contrast to what happened on the day where the prepared statement/SEP forecasts were leaning hawkish.The market reaction points to a dovish minutes rather than a hawkish one, in stark contrast to what happened on the day where the prepared statement/SEP forecasts were leaning hawkish. Yields backed up pre 2pm as the market, us included, had expected the minutes to expand on why the FOMC participants raised their dots among other things."
"The comments on the RRP are in line with the piece we wrote in April of how the Fed would raise rates (see link, while also staying cautious and looking to add more “design features” in fine-tuning the facility). The spread of 20bp is where RRP is now vs. IOER (when the program is in testing phase) so perhaps the Fed wants to keep it constant to allow for further flexibility. We think a spread of 10-15bp is more likely at first and in all fairness they could widen it as rates get further from the zero-bound."
"The real dovish comments revolve around the reinvestments: this is a critical piece for both the mortgage and UST markets. Now if the FOMC were to decide to allow the rolloffs to start before hiking, it would fall into the same trap as the ECB, which has synthetically tightened by letting its balance sheet contract (remember when QE1 came to an end and mortgages started prepaying, there was a tightening of FCI in the US as well)."
"The downplaying of inflation is relatively in line with our thoughts in that we expect some mean reversion to happen soon and wage inflation will take time to manifest itself in the numbers. We still like the trades we recommended earlier (see link) and as core view stick with lower terminal rate (via 5y5y) over time but that doesn't mean they won't rise sooner if things improve (we remain in the Q2 15 camp for the Fed‟s first hike)."