The Last Meeting
At the March FOMC meeting the Fed held its benchmark rate target at 0.25% to 0.5%, as expected, while cutting its outlook on the tightening path. The dot plot indicates that the central bank may hike rate twice this year, down 50% from its Dec projection of four hikes, underscoring increasing concern over global and domestic risks. Economic projection for GDP growth was revised lower to reflect this prevailing downside pressure. The economy is expected to expand 2.2% in 2016 (previous: 2.4%) and inflation to rise 1.2% (previous: 1.6%).
Data & Developments
The data profile since the turn of the year has certainly been interesting. Whilst initial January indicators were showing weakness in labour market conditions, the inflation environment and the manufacturing sector, the US economy started to forge some positive momentum toward the end of the month and over much of February and March with firmer prints in each of those three areas alongside growing consumer confidence. However, towards the end of March, indicators started to trail off again with inflation ticking down and the Unemployment rate ticking up.
- Jan retail sales better
- Jan CPI better than expected
- Jan Durable goods better than expected
- 4Q GDP better than expected
- Jan PCE better than expected
- Feb ISM Manufacturing & Non-Manufacturing better than expected
- Fen NFPs better than expected
- Feb Retail sales better than expected
- Feb CPI better than expected
- Feb Durable goods better than expected
- Mar Consumer confidence better
- Mar NFPs better than expected
- Dec PCE lower than expected
- Jan ISM Manufacturing & Non-Manufacturing lower than expected
- Jan NFPs lower
- Jan & Feb consumer confidence weak
- Jan trade deficit widened
- Feb average hourly earnings missed
- Feb PCE weaker than expected
- Mar Unemployment rate increased
- Mar CPI weaker than expected
- Mar retail sales missed
Alongside this raft of data, we have also heard regularly from various Fed members. Most notably we had comments from Fed Chair Yellen, which took rather a Dovish tone, saying the Fed should proceed “cautiously” with raising rates, highlighting her concerns over prevailing headwinds from weaker global growth, low oil prices and China. The Fed Chair was also not confident that the recent spike in inflation is sustainable. These comments came as a blow to bulls who had been bolstered by a series of more Hawkish comments from other members citing confidence in the economic recovery and support for the originally proposed rate path.
Over this period, we have also seen key developments in the global picture with a reduction in risk and volatility stemming from the slow-down in China, as conditions stabilize there, alongside a recovery higher in Oil prices with Crude sitting at new 4 month highs at $43.
Expectations For This Meeting
With the Fed having cut its tightening path at the last meeting, it is unlikely that we see much added in the way of new information at this meeting, which is likely to be a formality rather than a catalyst for any significant moves.
Referring back to those comments made by Fed Chair Yellen, citing risks from weaker global growth, low Oil and China, it seems reasonable to expect the Fed to acknowledge that these risks have diminished somewhat though have not totally subsided and thus continue to pose a risk to the outlook. Not expecting this meeting to be as Dovish as the last one though the Fed are likely to temper this with a message of caution. Bulls will be hoping for a clear nod to the June meeting but this is likely to premature.
USD positioning has been significantly unwound over recent months. CFTC data shows USD longs are down from 25% of open interest late last year to around 3% presently. As such, not expecting to see much further downside from this meeting and may indeed see mildly positive USD on the back of it
USDCHF has been moving steadily lower over the last 6 months and is currently mid wat through retracing towards the bearish channel resistance line around mid 0.98. There are two clear levels in USdCHF which I will be monitoring over the FOMC. We have clear structural resistance overhead at .9786 which may provide upside breakout opportunities if cleared, though be ware of that trend line resistance which may cap the move, and below market we have solid support around .9650s which may provide downside breakout opportunities if cleared.