Today’s podcast

https://soundcloud.com/user-291029717/fed-says-three-years-near-zero?in=user-291029717/sets/the-morning-call

Overview: Going nowhere

• Fed is going nowhere until at least the end of 2023
• Forward guidance now officially outcome based
• Markets little changed post Fed-  Eq a touch softer, UST curve steeper, USD mixed
• GBP and JPY outperform, EUR struggles while AUD and NZD hold their ground
• Another busy day: NZD Q2 GDP, AU Labour Force Report, BoJ and BoE, US Jobless claims and Philly Fed

I can’t think straight, Help me now before it’s too late

Now what do I care? ‘Cause we’re going nowhere

Going nowhere, Going nowhere, Going nowhere – Copy Cat

After the usual initial washing machine reaction to the FOMC

US equities ended the day lower, the UST curve marginally steeper and the USD is mixed. GBP and JPY end the day stronger, Euro softer while AUD and NZD are little changed. The Fed follows through from Jackson Hole with guidance for keeping rates lower for longer and allow the economy to run hotter. The Fed funds rate is going nowhere until at least the end of 2023, if not longer.

The key take-away from the FOMC Statement is…

The Fed will maintain the Fed Funds rate within the 0-0.25% target range “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”. There was also a slight rewording with regards to the QE programme, some might say giving it a slightly more dovish tilt, with the bond purchases not only supporting market function but also to “help foster accommodative financial conditions”. However, those looking for more explicit guidance of increased bond purchases would have been disappointed

So what does it all mean?

Well the Fed is certainly committed to keeping the Fed Funds rate between 0% and 0.25% for an extended period of time. How long? Well if we use the dot plot as a guide, the median dot shows no rate hikes to end 2023. Looking at the individual dots, one daredevil pencilled in a hike in 2022 and four in 2023 and given the long term dots are higher, it means that the majority of the Committee members expect the first hike in 2024 or beyond.

After Fed Chair Powell’s Jackson Hole speech

We now have a formal switch in forward guidance away from a specific time and into an outcome based approach.  Here is where the clarity ends and the vagueness begins. What we know is that the Fed Funds rate is going nowhere until a) The Committee’s assessments of maximum employment has been reached b) and inflation moderately exceeds 2 % for some time.

Fed Chair Powell Jackson Hole speech admitted the Fed was too quick in pre-empting a rise on inflation during its last rate hike cycle (which began late in 2015), lifting the Funds rate before the unemployment reached the Non-accelerating inflation rate of unemployment (NAIRU), at that time believed to be just above 4%.

So this time the Fed is going to wait until maximum employment is achieved, the problem is that by its own admission “maximum” employment can’t be precisely estimated. As for inflation we also don’t really know what moderate means in the context of exceeding inflation and neither we know how long some time means. When asked about the conditions on  inflation, Fed Chair Powell said the Fed wants inflation to overshoot 2%, but not by a wide margin nor for an extended period. So after a lot of words, we were left none the wiser.

Looking at the FOMC new forecasts GDP has been upgraded near term with the 2020 numbers at -4.0% / -3.0% range from -7.5% /-5.5%, but figures in 2021 and 2022 were lowered. The Unemployment rate projections lowered to a 7%to 8% range in 2020 from 9% to 10% and 5% to 6.2% in 2021 from 5.9% to 7.5%. Core PCE inflation estimates were raised to 1.3-1.5% from 0.9-1.1%.

The above policy mix is designed to push up inflation expectations, but with Congress unable to move on a 4th stimulus plan and the latest retail sales report disappointing (more below), the outlook may be souring and the Fed near term projections may prove too optimistic. On this score at the press conference, Fed Chair Powell noted that more fiscal policy is likely to be needed and when questioned as to whether Congress was the only option for adding further stimulus, Powell reiterated the Fed has many powerful tools and was not at all “out of ammo,” while policy would be left “highly accommodative.”

After the typical swift up and down market reaction to the FOMC

US equites ended the day lower with S&P 500 -0.46% and the NASDAQ -1.25%. The USD ended the day mixed and the UST curve was a touch steeper. If the Fed’s policy works and inflation expectations rise,  the USD should be more vulnerable, but so far there has been little sign of higher break-evens.

Looking at FX in more detail

The USD BBDXY index is flat for the day, showing a small recovery during Fed Chair Powell’s press briefing.

Within G10, GBP and JPY are  the outperformers, up 58% and 0.46% respectively. Both pair were making inroads ahead of the FOMC and managed to retained most of their gains post. Cable appears to be enjoying a repricing as the market reassess PM Johnson’s threat to EU trade negotiations from its internal bill, ignoring deflationary forces affecting the economy ( more below). The pair now trades at 1.2964.

Meanwhile

After breaking the ¥106 mark, USD/JPY has continued to drift lower and now is toying with the idea of making a sustained move below ¥105.  (  pair currently at ¥104.94).

After a bit of volatility around the FOMC announcement

AUD and NZD are little changed over the past 24 hours. The AUD now trades at 0.7306, after trading to an overnight high of 0.7345 while NZD is at 0.6733 following an overnight high of 0.6759.

NZD got a bid yesterday after the release of the pre-election economic and fiscal update. NZ Treasury’s growth outlook showed a shallower recession than expected back in May but also a slower recovery period, with an assumed closed border, bar some safe travel zones, through to the end of next year. The unemployment rate peaks at a lower 9.8%, but stays high for longer, still above 7½% by June 2022. Large underlying fiscal deficits are projected for some time, albeit declining from 10½% of GDP in 2020/21 to 3½% by 2023/24, sending net core crown debt to 55½% of GDP by that end point.

In economic news

US retail sales data showed further recovery, with ex auto and gas sales up 0.7% m/m in August, a much-reduced pace compared to recent months and lower than expected. Sales continue to be boosted by the reopening of stores, but the expiration of the supplementary $600 weekly unemployment benefit was a likely key drag on further recovery and will hinder further recovery. Meanwhile the US housing market remains hot, with the NAHB index rising to a record high, up 5 pts to 83.

UK Inflation for August printed lower

But as much as expected. Headline CPI came in at+0.2% y/y from 1% and a zero f/c. Core PI fell to 0.9% from 1.8% and a 0.5% f/c. The government’s ‘Eat Out to Help Out’ scheme drove prices lower with catering services fell to -2.8% from +3.4%. Inflation ex catering was also 2/10 lower, suggesting there is broader weakness. Inflation is set to fall further in Oct when energy prices cuts feed through

In other news

Top US health officials have weighed in on the likely timing of widespread vaccination of the US public. The deputy chief of staff at the Dept of Health and Human Services suggested that with FDA approval before year-end, every American should be able to get vaccinated by the end of March. The more well-known Fauci said Q1 timing was aspirational and more likely widespread vaccination would be available mid-2021. This view seemed to be backed up by CDCP director Redfield who suggested late Q2, or Q3 next year.

EU Commission President Ursula von der Leyen delivered a wide-ranging State of the Union address this morning. She burnished the EU’s proposed green agenda by announcing plans to cut CO2 emissions by 55% instead of the existing 40% in a period from a 1990 baseline to 2030. Within the EU750 ‘Next Generation’ Recovery Fund, von der Leyen announced EUR225bn of this would be issued in green bonds – that’s roughly equivalent to the global total of green securities sold in 2019.

Coming up

• It is another busy economic calendar today starting with NZ Q2 GDP this morning, followed by the August Labour Force report in Australia. This afternoon, the BoJ Policy meeting outcome comes ahead of the EU Final CPI August print and the BoE meeting later in the day.
• Tonight, the US gets jobless claims (850k exp vs 884k prev.), Housing starts (Aug) and the Philly Fed (15 exp.vs 17 prev.)
• NZ releases its Q2 GDP today and BNZ expects a fall of 13% q/q. This is extremely close to the market’s median expectation, while the RBNZ had a 14.2% fall built into its August MPS. Providing the Q2 GDP outcome is not outlandish, attention will remain solely on how well (or not) economic activity is recovering.
• Australia’s labour force data for August should show the impact of the unprecedented stage 4 lockdown in Melbourne. As such, NAB forecasts total employment fell by 40k in August (Mkt at -35k),. This should see total hours worked fall again, while the unemployment rate will continue to rise, where we forecast it will hit 7.8% (Mkt at 7.7%).
• No changes are expected by the BoJ today, but the Bank will release a new set of forecasts. GDP growth could be assessed a little bit higher, but inflation is unlikely to get upgraded. This means the BoJ will remain committed to its ultra-easy policy setting for a very lomg period of time.
• The BoE is also expected to leave policy unchanged, but with the prospects of further weakening in the Labour market and subdued inflation alongside an anaemic economic recovery compounded by virus and UK-EU trade uncertainty, there is a strong possibility the Bank will signal further easing is likely around the corner.

Market prices

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