FOMC minutes stole some of the Jackson Hole thunder


There are two highlights from the last full week of August that will grab the attention of investors: the Federal Reserve Symposium () and the preliminary August PMI reports. Yet the 800-pound gorilla in the room remains the virus. For many countries with limited access to vaccines and / or low immunization rates, the calls from some Western presses to live with it seem callous and out of touch. Vaccine hesitation in the United States appears to have been affected by the recent increase in cases that are straining hospital capacity in several states. The number of cases of the virus in the United States has roughly doubled in the past two weeks.

Supply chains are again under strain. This can mean higher prices to spread the scarcity, but also delays and other disruptions. Some survey data from early August is already drawing inspiration from it. Encouraged by a few disappointing economic reports, some economists are shifting growth projections from Q3 to Q4. Several leading companies have postponed their return to the office. Preliminary PMI data posed a major risk, but the market is looking further ahead, and many recognize the fluidity of circumstances and anecdotal reports of some moderation in economic activity due to the virus. The fall in prices to their lowest level in three months, despite the United States falling to its lowest level since January 2020, partly reflects these concerns about demand.

Fairly or unfairly, voters will blame leaders for handling the pandemic. Even before the collapse of Afghanistan, support for US President Biden waned, and many attributed this to the increase in contagion. France has protested for six consecutive weekends against pressure from French President Macron for COVID-19 vaccination cards. Hundreds of people were arrested in Berlin last week in protest against restrictions imposed earlier this month. There have also been protests in the United States against vaccine requirements and / or passes.

Two G7 members, Germany and Canada, are holding national elections in September. Germany will choose Merkel’s successor. She has been chancellor since 2005. Laschet, head of the CDU, has so far been an inspiring candidate. For the first time, polls suggest it is possible that the Social Democrats, who have been Merkel’s junior CDU partner in four of the last six governments, alongside the Greens and the Liberal Democrats, are forming a coalition . Still, it seems very fluid and the evolution of the virus in the coming weeks could be significant.

Canadian Prime Minister Trudeau surprised no one with his call for an early election on September 20. Trudeau’s bet is that the vaccination effort offsets the difficult start of the vaccine rollout and the combination of fiscal and monetary support overcomes fears some parts of the electorate may have on other issues, and allows the Liberals to regain the parliamentary majority lost two years ago. . The, which was at four-year highs in early June, up about 6% for the year, has weakened over the past two months and is now down about 0.2% for the year, thereby relieving exporters.

Given the Liberal Democratic Party’s dominance in Japanese politics, the winner of his leadership race in September will most likely be the next prime minister. National elections are due to take place before October 22, four years after the last. Prime Minister Suga’s support has fallen below 30%, which is seen as a key threshold, but the barriers to a leadership challenge are high. Finally, Norway is not a member of the G7, but it goes to the polls on September 13. The Norwegian central bank remains confident in the recovery of the economy and reaffirmed its intention to hike rates at its meeting 10 days after the election.

II

The Fed’s Jackson Hole confab has been a focal point of speculation looking for a hint of cutback announcements since the start of this year. The news that neither Lagarde from the ECB nor Bailey from the BOE will be in attendance helps underscore the focus on the domestic market. Indeed, it seems almost binary: either Fed chief Powell suggests the central bank is approaching a cut announcement, or he doesn’t. The from July leave little doubt on this. Most FOMC officials predict that a cut before the end of the year will be appropriate.

Powell has promised an advance warning to investors before changing the pace or composition of the Fed’s buying. This is to minimize the risks of a market disruption like the “taper tantrum” of 2013. At the same time, strategically, it is important that the Fed maintains maximum flexibility. Given timing considerations and the fact that after the September meeting, the Fed has two more meetings, November and December, indicating in September that it will soon be ready to adjust its bond purchases maximizes the leeway of the Fed to accommodate incoming data, if necessary. That said, our idea that the burden has shifted from the need for more and better data to, barring a surprise on the downside, the Fed will cut its bond purchases seems to be borne out by the July minutes.

Also, consider that at the June FOMC meeting, 7 of 18 Fed officials felt that a hike in 2022 was likely appropriate. Given two months of growth of over 900,000 and other labor market indicators, such as (new pandemic lows), it wouldn’t be surprising if a few more officials are pushed to push back a hike from 2023 to 2022. To do this, the purchase of bonds must have ended some time (a few months?) Before the rate hike.

Several Fed officials have suggested a faster cut than was the case last time around, and some estimated it could be completed by mid-2022. Assuming the reduction begins in December, the seven-month average pace would be around $ 17 billion. However, officials will likely want to move it forward a bit to allow for a gradual conclusion.

The Federal Funds Term Band nearly anticipated a hike at the September 2022 FOMC meeting. Once again, remember that the contract is settled at the average effective rate (weighted average) of Fed funds during the month. Assuming that in the first 21 days of September, until the conclusion of the FOMC meeting, the fed funds rate remains at its current effective average of 10bp. Then the Fed raises the target by 25bp, and the effective rate averages 35bp over the last nine days of the month. This produces an average of about 17.5bp for the month. The September 2022 federal funds futures contract settled at 16bp last week. By our calculations, the December 2022 contract has a fully discounted 25bp hike and a very low chance of a second move by the end of next year, as two of the official 18 “points” of the Fed had anticipated it in June.

In the past, Fed officials have suggested that they want the central bank’s balance sheet to hold only T-bills, and some officials share our concern about buying mortgage-backed securities when the market hits. Real estate is solid and house prices are rising at an all time high. This has sparked some speculation that the Fed may accelerate the reduction of MBS more than that of Treasuries. Powell himself downplayed the direct link between Fed purchases and house prices. The July minutes suggest that there is no majority in favor of lowering MBS earlier or faster than Treasuries.

Of course, some officials would like to see another jobs report before they feel comfortable taking a further step towards downsizing. A week after the Jackson Hole confab, the Bureau of Labor Statistics will release the August jobs report. The anticipated appeal is an increase in the non-farm payroll of around 750,000 people. Although slower than the past two months, he would still be considered strong. It would bring the three-month average to nearly 880,000, the seventh consecutive month it would have accelerated. The average this year, through July, has been 617,000. Other details, such as a further drop in unemployment and underemployment rates, would also make some officials more likely to support a formal cutback announcement in the month. next.

III

Three central banks from emerging markets are meeting next week. That of Israel is the first on August 23. Inflation is close to 2% year-on-year and the base rate is 10bp. However, the is under no pressure to increase rates. The increase in COVID cases could temper the growth the central bank expects to reach at 5.5% this year. The seven-month highs reached earlier this month and the central bank has indicated that the $ 30 billion intervention fund, announced in January, is almost depleted but the central bank is not limited to it.

Hungary’s central bank is meeting on August 24 and there is no doubt that it will propose another rate hike. The base rate doubled this year to 1.2% in two movements (June and July). Another 30bp increase in August. Although it eased in July for the first time this year (4.6% yoy vs. 5.3% in June), it is mainly due to the base effect. In fact, the base effect works against further improvement in the coming months. After the likely move next week, the central bank is expected to hike rates two more times this year.

South Korea’s central bank meets on August 26. The result is a closer call than the other two. The governor of the central bank has indicated this this year. is higher than the target, the financial risks are perceived as increasing. However, the record wave of COVID should make the central bank wait for an opportunity in the fourth quarter. The market has forecast a rise over the next three months and two over the next six months. After falling to its lowest level since last September, the index began to recover in the middle of last week following the implicit threat of intervention from the Ministry of Finance. The finance minister warned that the won was having a bearish effect and officials were “watching” the market.


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