Focus On Statement, Dot Plot - FOMC Preview
FX Daily | Mar 21, 2018 13:29
It is shaping up to be a potentially wild one tonight, and with the FOMC set to hike rates by 25bps, the focus has quickly shifted to the statement and dot plot which sees more market participants joining the cue for a steeper path through 2018.
We can now assume a 3 hike scenario is now embedded into the mindset, as it is in the dot plot, but with US inflation picking up, but there is a fly in the ointment with earnings data still painfully sluggish. This is something the Fed will be wary of, as are central banks globally. Nevertheless, headline growth was markedly higher, and at over 300k in Feb, the numbers warrant maintaining hopes that wage growth will eventually - as painfully slow as it is - feed through.
Fiscal stimulus will add to the risk that the dot plot could edge up a little, and we have already heard from a number of Fed members that more than 3 (hikes) should be under consideration given fears of falling behind the curve. This would hasten the proximity for the next economic downturn, but this view is countered by the fact that the majority of the voting members may want to see a little more pick up in growth before underscoring a steeper rate path at this stage in the year.
Any hint of a steeper path (this year) would almost certainly see a positive reaction from the USD to some degree, but as the longer term concerns over the twin deficits linger in the background, we also have to be mindful of just how much and how far this can be.
Naturally, focus will be on the longer end of the curve, where the 10yr benchmark is still rooted to the 2.80-2.90% range, while the 30yr is back in the middle of the year range just inside 3.0-3.20%. Markets are also of the mind that any excessive hawkish communication can be destabilising for the equity markets, so when say 'hint', we expect any guidance to be subtle - though hard to play in the dot plot - with a view to preparing the market rather than spooking it after the sharp fall out seen in Feb.
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