FOMC - Goldie Lock or wake-up call

 

 

 

• Saxo Bank sees no change and an adjustment(cut) of the IOER of 5 bps (Interest-on-excessive-reserves)    (Link to present debate and issue with IOER trading below Fed Funds)
• Market is looking for dovish tilt to support economy through lower Fed projections
• Saxo Bank is more concerned about future growth than inflation, but this is NOT part of the consensus agenda.

 

• If consensus is right: RISK-ON – long US Equity, and higher EURUSD
• If Saxo Bank is right: Small RISK-OFF – A correction inside the present bull market as technical and valuations extremely stretched especially relative to economic data & earnings

 

 

The focus will be on deflation after weak readings on PCE and GDP deflator – It's sometimes lost on the market that the mandate for Fed is "price stability" – Stability = Prices levels which is not hurting business and economic activity – A 1.5% inflation reading is hardly a real reason for concern, as the almost totally random target of 2% is not at risk for now, but expect some wording to address this from the FOMC both on the short fall on inflation but also in the press conference questions on IOER vs. Fed Funds

 

We see inflation ticking up as we firmly believe energy is 90% of the inflationary direction with energy  trading in the high end of recent ranges expect a higher not lower headline inflation from, something the 5Y5Y Inflation swaps also reflects nicely.

 

West Texas Intermediate (US$ - YoY change) – vs. Consumer Price Index – Source: Federal Reserve Bank of St. Lois

 

 

Comment: Energy prices collapse from 86.70 $ in early October 2018 has translated into a soft period for inflation as seen here by year-over-year drop in WTI – It's now again moving towards positive and when we pass October it will move significantly higher

 

US Inflation Swap – 5y5y – vs. Consumer Price Index – Source: Federal Reserve Bank of St. Lois

 

 

Comment: Despite all the talk of deflation – the 5y5y as a proxy for future expected inflation has continued to move higher. We see this continuing as Congress talks about infrastructure spending and President Trump continues to support all kinds of versions of MMT.

 

Saxo Bank is more concerned about the growth outlook than deflation despite the "strong" Q1 data point – most of the excess performance came from the current account (+100 bps) as trade was impacted by the expected China vs. US trade deal to end by March 31^st.

 

The Chicago Fed National Activity Index (CFNAI) is our best proxy for actual growth in the US economy and the signs is not good. We operate under our new macro theme called: The False Stabilization – where we argue that the Great Policy Panic create as response of lower steering rates and yields, but these are transitory in a world with no reforms and most central banks at loss to continue QE and any version of that.

 

 

 

We continue to think the market is in a sideway formation after the strong run up in Q1 – We see the next risk infliction point in July/August where enough time will have passed for the market to realize that improvement in economic activity is not forthcoming especially not from a policy response of lower funding costs, and it will also be post the China US trade deal. Our risk outlook is neutral – with small overweight in long-term US fixed income relative to cash.

 

Here is excellent update from www.briefing.com

 

 

Full Link: Briefing Investor

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

https://www.home.saxo/insights/news-and-research/authors/steen-jakobsen

Twitter: https://twitter.com/Steen_Jakobsen

 

 

 

 

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