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11 Mar 2015
Markets to price in June Fed lift-off as the central case – Nomura
FXStreet (Barcelona) - Jens Nordvig, Research Analyst at Nomura, views that the Fed might tone down its forward guidance in terms of being ‘patient’, and in the short-term term the market would move to price the June- lift-off as the central case.
Key Quotes
“.. we think the statement next week will tone down the forward guidance, i.e., the sentence “the Committee judges that it can be patient in beginning to normalize the stance of monetary policy” will be watered down, with the word “patient” coming out."
“If this is the case, it is unlikely that the implied probability of a June hike will drop materially below 50%, unless the data takes a clear turn for the worse. In fact, we can imagine that in the short-term, the market will move to price June lift-off as the central case (rather than sitting on the fence).”
“It is not only the language around patience that matters for rates and the dollar. The Summary of Economic Projections are getting more and more important as we get closer and closer to lift-off, and the Fed’s projections for the economy and rates should have a more powerful signaling effect.”
“In relation to the dots for end-2015, there are currently outliers at both the low end and the high end of the spectrum. What matters, is the nine dots towards the middle. Within this group, two are calling for two hikes (of 25bp), four are calling for three hikes (of 25bp) and three are calling for four hikes (of 25bp).”
“Nevertheless, it seems likely that within the core group, the median amount of hikes will be three rather than two.”
“Hence, market pricing both in terms of timing of lift-off and the number of hikes implied for 2015 does not look excessive in the short-term.”
Key Quotes
“.. we think the statement next week will tone down the forward guidance, i.e., the sentence “the Committee judges that it can be patient in beginning to normalize the stance of monetary policy” will be watered down, with the word “patient” coming out."
“If this is the case, it is unlikely that the implied probability of a June hike will drop materially below 50%, unless the data takes a clear turn for the worse. In fact, we can imagine that in the short-term, the market will move to price June lift-off as the central case (rather than sitting on the fence).”
“It is not only the language around patience that matters for rates and the dollar. The Summary of Economic Projections are getting more and more important as we get closer and closer to lift-off, and the Fed’s projections for the economy and rates should have a more powerful signaling effect.”
“In relation to the dots for end-2015, there are currently outliers at both the low end and the high end of the spectrum. What matters, is the nine dots towards the middle. Within this group, two are calling for two hikes (of 25bp), four are calling for three hikes (of 25bp) and three are calling for four hikes (of 25bp).”
“Nevertheless, it seems likely that within the core group, the median amount of hikes will be three rather than two.”
“Hence, market pricing both in terms of timing of lift-off and the number of hikes implied for 2015 does not look excessive in the short-term.”