The expected Fed hike tomorrow may be the first "non-hike" in years – and one part of the dual mandate is starting to crack open a little, namely inflation:
Since the last report on May 12th, the dollar and interest rates have corrected dovish into a Fed still taking as if nothing has changed! GS which has been relative bullish on inflation is out with report, from which I have taken main points: (underlining mine)
GS sees a MoM print tomorrow on core inflation of 0.15 bps tomorrow slightly below consensus, but they continue to add that this is probably "the minimum needed" to secure integrity of Fed policy (see their wording below)
Inflation expectations measured here as 5Y5Y US is now 189 bps after reaching 220 bps in early 2017 (-31 bps) – a large drop considering the "reflation theme" which the market priced in…..
The further risk incoming is my favorite words: Credit Impulse – there is an update from UBS's Kapteyn: (Link @zerohedge)
Things has gotten worse!
This is the expted data on CPI:
Here is CME's group's probability of hike in June:
Goldman Sach: Global Markets daily: An inflation aid needed for the US Dollar (June 13th)
Focus: A Reacceleration in US Inflation Needed for the Dollar to Move in the Direction of Our Forecast After slowing down for two months in a row, we expect a modest sequential reacceleration in May core CPI inflation to 0.15% mom tomorrow
Although such a print would still be a touch below Consensus expectations and would still lead to the year-on-year rate declining further (to +1.8% from +1.9% in April), we think it is the minimum necessary to reduce concerns that the Fed would be unable to make progress in scaling back its accommodative monetary policy stance (
Indeed, the market had an outsized reaction to the deceleration of core CPI when the print was released on May 12. Since then, the DXY index has weakened 2.6%, the expected cumulative increase in the federal funds rate over the next 12 months has declined by 6bp and the 10-year US break-even inflation rate has fallen 13bp. Although many other factors have contributed to these moves since the release of the CPI print in May, in today's Daily we show that the Dollar move has been much larger than implied by the historical relationship with surprises in core CPI.
The non-hike is also based on how US Financial conditions has performed this year (Higher is easier)
Conclusion:
Fed will hike but most likely in a "non-hike way" meaning this hike is "free" for FED as financial conditions is actually easing while they hike – the monetary policy is at least short-term unable to produce any shift in sentiment – hence the wording and dots becomes more important – Will Fed hike dovish? Most likely…which should set-up further fixed income buying (breaking 200 bps?) – but first take not of CPI tomorrow, a weak one could lead into FOMC… The peak "cyclically" was January, our 9-month lead indicators continues to perform…
Recession next?
Steen
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
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