Yes folks, it’s looming ever closer and, as always, I’m going to tell you to trade what you see. No prizes for stupidity, or indeed bravery sometimes, in this game. We shall get enough to trade with on the announcement. There is little doubt though that the FOMC has much to consider not for just for its own economy but the ramifications/impact of its decision/rhetoric change around the globe.
Here’s a few other thoughts ideas courtesy of our friends at efxnews.com
RBS
1- FOMC statement: The Fed does remove “considerable time” and replaces that language with “patient” language, which would be consistent with a mid-2015 rate hike given the use of “patient” in its signalling prior to the 2004 rate hike cycle…USD Positive.
2. Press Conference: The Fed does little more than acknowledge rising stress in financial markets, giving no indication of shifting views on rate hikes…USD Positive.
3 FOMC projections: The net impact of stronger economic data and a move lower in market measures of inflation expectations may mean that the Fed’s dot point medians for the Fed Funds rate are little changed in December. Similarly, we don’t see much scope for a revision to the underlying economic projections…USD Neutral to Dovish.
Nomura
1. Will the Fed take out the ‘considerable time’ language, and thereby weaken its forward guidance further?
2. How will the dots (projections for interest rates) move, up or down?
3.Will the Fed voice any additional concerns about too low inflation, including inflation expectations?,
All told, we expect the Fed to stick to tone that signals that gradual policy normalization is on track. And while market surveys might indicate a high probability of the ‘considerable time’ language coming out, the actual market pricing of US rates is very far from the dots
“To keep it simple, just look at Dec-2015 Eurodollars. They are at a 0.85% rate, compared to 1.09% after the September meeting. Similarly, June-2015 Eurdollar rates are at 0.42%, compared to 0.57% after the September Fed meeting. We are priced more dovish, even if the Fed probably feels more confident in light of recent GDP and labor market data
Trade Strategy- In 2014, it has been challenging to trade this normalization in US rates. But the dollar continues to react, and we expect more of this on the back of the signal from the Fed this week. Since risk sentiment is weaker, we prefer expressing USD longs in a balanced basket form (not only vs EUR or JPY). In line with this view, Nomura recommends a volatility-weighted basket of long USD vs CAD, JPY, CLP, COP and ZAR. Nomura also holds a short EUR/USD from 1.2390 targeting a move to 1.20.
Credit Agricole
We look for no change in the fed funds target at the December FOMC and believe the Fed will begin to gradually raise rates in Q3 2015.
We believe the odds favour removing the “considerable time” reference in the FOMC’s forward guidance while noting the FOMC’s patience regarding the timing of the first rate hike. We do not believe that this would signal a change in the policy outlook, which remains dependent on the data. We expect Chair Yellen to stress the data dependency in her press conference remarks.
The assessment of current economic conditions may continue to note solid job gains and gradually diminishing labor resource underutilization, while inflation continues to run below the Fed’s objective. The impact of lower oil prices (growth-positive and disinflationary) will likely be noted.
-The updated Summary of Economic Projections (SEP) will likely lower unemployment rate projections while keeping the growth outlook roughly unchanged. Core inflation projections may be lowered slightly. -The overwhelming majority are expected to see the rate lift off in 2015. We expect the year-end 2015 median fed funds rate projection to be close to the September projection.
