Article / 28 July 2016 at 3:52 GMT

The Matrix: A quick take on the FOMC and what's next

Global Macro Strategist [Asia based] / Saxo Bank

  • The Fed showed no change in language to anything cautionary or dovish
  • Fed probably wiser to wait for the other side of July before it 'capitulates'
  • Where Japan is concerned it's not about numbers but numbers v expectations

By Kay Van-Petersen


There was a divergence between immediate market price action and the Fed statement. As could be seen by spikes in EuroDollar, Aussie, Kiwi, gold and contraction in US yields the market seemed to have been positioned for a more hawkish statement.

Yet when you look into the statement, its definitely a lot less dovish amd more constructive than the previous meeting. We had:

  • Esther going back to advocating for a rate hike, once again the sole dissenter
  • Near-term risks to the economic outlook have diminished
  • More constructive take on the labour market Remember the dismal May nonfarm payrolls and the blowout in June NFP numbers - +11K & +287k respectively.
  • “Household spending has been growing strongly…”
  • There was no change in language to anything that was cautionary or dovish. It would not surprise me if they are playing it safe given that they walked into a wall with the May NFP and could be waiting for further confirmation.
  • With that said, there is still plenty of time to get the market ready and perhaps they are wiser to wait for the other side of the July US NFP (August 5), before being forced to capitulate again on their previous hawkish march earlier this year. 
  • Chart below shows Citi US Economic Surprise index which has continues to explode upwards. Near-term risk is to the downside for a potential correction in trend. We are currently at the highest levels since December 2014.

US Citi Surprise Index, June 28

Source: Bloomberg

So what’s next for the Fed and US dollar watchers leading to September meeting?

Apart from the usual flock of Fed speakers buzzing around, next key dates are:

- August 17, FOMC Minutes
- August 27, Jackson Hole Symposium
- September 21, Fed meeting
From a US economic data perspective, more weight will be on employment, growth and inflation data points. 
- Jul 29, 2Q GDP 2.6%e +1.1%p
- Aug 1, ISM Manf. 53.2p
- Aug 5, US NFP for Jul (287k p for Jun)
- Aug 16, US inflation
- Aug 26, 2nd 2Q GDP reading
- Sep 1, ISM Manf.
- Sep 2, US NFP for Aug
The market looked to be positioned for a more hawkish statement from the Fed. Photo: iStock

For Friday, we have US Q2 GDP and the big anticipated BoJ/JP stimulus

  • US preliminary Q2 GDP is expected at a healthy +2.6% compared to 1Q +1.1%
  • BoJ / JP / Yen / NKY: Lots of numbers, whispers and posturing around the BoJ/Japanese government announcement tomorrow. My current thinking is, unless you are going to put out an astronomical big number, having big figures floating around does not help you. Especially when some of those are aggregate multi-year numbers. 
  • It’s never about the actual number, it’s about the actual number against expectations. This is what people (and often myself – getting better though), keep forgetting… it’s a relative game… 
  • So, if Abe says his fiscal stimulus package will be over USD 265bn (Over 28 trillion yen), there will be an initial focus on the headline number. But the key point will be the actual detail, how much of the stimulus is immediate and real cash outlays… as opposed to subsidy, loans and soft style measures. So in this case whilst headlines looks impressive at circa 5% of GDP, actual cash spend may be 1%.
  • Don’t forget initial reaction in Q1 when BoJ moved for QE 3 a la negative rates, USDJPY was 118.80 levels before that.
  • KVP and our options desk feel risk is to the downside on USDJPY. Current implied volatility indicates a breakeven from 105, of 102.20/107.00. We feel if they disappoint, the yen could strengthen big time, easily taking out 102.20 and JP equities could go cliff diving once again. So from that context, Friday is potentially a very big profitable day.

Thanks and profitable trading out there folks. Great to be back in the spaceship.

-- Edited by Adam Courtenay

Kay Van-Petersen
(KVP) is s Asia Macro Strategist at Saxo Bank, please follow him on twitter @KVP_Macro and at SaxoStrats. Don't forget Macro Monday – your weekly cross-asset Global Markets Call. Please join us here live again next Monday at: 0830 [SG/HK], 0930 [TOK], 1030 [SYD]

28 July
Jim Earls Jim Earls
Remember the projection in 2015 was for 4 rate increases this year alone-Will we even get one? Also, remember when Hoenig was the lone dissenter-appears to be their MO to keep it looking for real.
28 July
Jamesawann Jamesawann
It just mean that two raise rate left with one lower projection rate to wait and see for Dec decision of another rate determine by condition of first increased if does happen in sept
28 July
KaranKK KaranKK
KaranKK KaranKK
Based on the previous experience, when BOJ introduced negative interest rates, markets took it as a negative sign, USD/JPY fell and Nikkei fell. What happens if BOJ gets into more negative interest rates ? Will the Nikkei rally and USD/JPY rally, as expected or does the market again take this as negative news ?


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