ThinkMarkets - Analytics


    464.75 4.25/10
    80% of positive reviews

    FOMC statement is still about the timing

    The timing of the famous FED interest rate hike is a topic which is just not going to go away, so we find ourselves scrutinising any and every scrap of information to deter when this rise is going to occur. I think we can safely bet there will be no rate rise this week so it becomes an issue of clues to timing the rise, over if they raise or not.

    If we are to believe the economists consensus then there is an 80% chance of FED raising rates in September with the main argument being it allows them to raise at least once more occasion during 2015. This is logical as Yellen has stated they want to raise rates "soon" and it will likely be a very gradual transition of rates (baby steps, if you will). 

    The markets however disagree with the economists as they are only pricing in a 30% chance of a rate rise in September, according to Futures prices. One way of looking at this disagreement is to side with the markets as they have 'skin in the game'. Of course, if they are wrong then we have potential for some rapid repositioning of Greenback bulls if FED doesn’t raise rates in September. ​

    We stand the risk of an uneventful FOMC, or perhaps more Dovish than the markets are expecting. This will likely result in a lower USD and higher Euro following the release but markets will the shift their focus to Q2 GDP. 

    If Q2 GDP hits 2.5% expectation then September Hike will continue to gain traction (and stronger USD). Q1 GDP was a dire shock for many, which was dealt an extra blow when the revision also came in soft. This means GDP could in fact be a larger market mover than the FOMC statement, as it is likely to alter the following statement if it either hits or misses expectations. 

    It then comes down to a question of whether you think FED 'will' raise rates, or you think they 'should' raise rates. This small difference here is where my assumption of the FED not raising rates this year could indeed turn out to be incorrect. I am no Central Banker but I would not personally be raising interest rates in an environment which has recently provided.

    - Slower Chinese growth (continued concerns over future growth)
    - Commodities in a secular bear trend
    - A stronger USD Dollar, which could be exasperated if rates are then raised

    IMF have already warned against a rate hike this year but FOMC are not likely to be swayed by what others think. There was also a report that the FOMC website had 'accidently' included stronger staff projection figures which are not supposed to be available to the public for five years after they were produced. Whether this was accidental or not it does suggest there may be data which FED officials favour, over the usual headline data we plough through. 

    For now the expectation of a September raise will probably persist but this could easily change as we approach September. I was right about FED not raising rates in June '15 (back in December) and still favouring for them to hold off beyond September to either December or Q1 2016. But I must admit to being less confident on the timing of 'lack of action' this time around as there has been too much noise from FED officials in favour of a hike. So why still favour a delay? Because a lot can happen in two months on a Global scale to scupper any chances of a rate hike. As always, time will tell. 

    To leave a comment you must or Join us

    By visiting our website and services, you agree to the conditions of use of cookies. Learn more
    I agree