USD: Trading The FOMC Minutes - Views From 12 Major Banks

The following are brief expectations for today's FOMC minutes from the September meeting as compiled from the related research reports of 12 major banks.  

BofAML Research: The FOMC minutes should be closely examined for the following: 1) conviction about the December hike; 2) reason for the downgrade to the longer-run path for fed funds rate; 3) debate over the reasons for low inflation; and 4) influence of easy financial conditions on policy decisions

BTMU Research: The market already appears well priced now for a December Fed rate hike. We do not expect the release later today of the latest FOMC minutes to materially alter expectations for a December rate hike. There was clearly strong support for a December hike at the September FOMC meeting as reflected by the updated dot plot which revealed 12 votes in favour compared to only four against

Credit Agricole Research: The minutes will shed more light on the divisions between those who see the recent inflation readings as a significant warning signal and those who see them related to temporary factors and have confidence that tight labor markets will eventually generate price pressures. Financial conditions, which continued to ease despite recent Fed tightening, are a key theme for the more hawkish camp and will be monitoring any further comments on that topic in the minutes. A December rate hike is now 75% priced in and we don’t expect the minutes to change these odds significantly. With the US rate environment fairly stable, particularly in the front end of the curve, this week’s USD sell-off is unlikely to intensify, in our view. 

ING Research: It would be remiss not to mention the Sep FOMC minutes today, but for some time now our motto has been that the Fed remains merely a subplot for the USD. If anything, the minutes will show the current dichotomy within the Fed on big-picture issues related to the US economy. Such mixed messages are why we think markets will remain sceptical over pricing in a steeper US rate curve.

Nomura Research: We expect the minutes from the September meeting to reflect the amount of debate among participants about recent inflation weakness. However, there will likely also be some debate surrounding the FOMC’s evaluation of financial conditions and asset prices. At the post-meeting press conference, Chair Yellen stated that “sometimes movements, upward movements and asset prices can, for example, reflect a change in market participants, a reduction in market participants' estimates of the longer-run level of interest rates.” This is a view previously shared by St. Louis Fed President Bullard but contrasts with previous statements by New York Fed President Dudley. Thus, the minutes could shed further light on this discussion. 

Barclays Research: We expect the FOMC minutes to show that most participants see recent disinflation as largely driven by transitory factors. We expect the discussion to remain focused on inflation and its shortfall relative to what the Fed’s Phillips curve framework would suggest, but we believe most participants will view the unexplained weakness as dissipating over time, thereby permitting a return of inflation to the target. The minutes may indicate that members preferred to reduce their estimate of the longrun neutral rate of interest as opposed to halting the normalization process. Elsewhere, we expect the minutes to include discussion as to why it was time to begin balance sheet runoff and how members see the balance of risks to the outlook for the US economy. 

TD Research: The $ rally is starting to run out of steam, leading many to wonder whether the recent news around tax reform is the catalyst. We demur and think the impetus is broadbased rather than idiosyncratic.  We're looking for more USD downside on today’s minutes, especially as the market will latch on any dovish comments linked to inflation.

Scotiabank Research: The USD is little changed on the day as markets mull this week’s events in the US (focus on President Trump’s tax reform plans) and Europe (Spain) whilst awaiting today’s release of the Sep 20th FOMC minutes. Generally, we continue to view the broader trend in the USD as more likely to weaken, reflecting strengthening global growth and expectations of rising interest rates outside of the US which will reduce the USD’s growth and yield advantage. In the shorter run, however, we think investors will be reluctant to short the USD while US tax reforms remain a viable prospect and we are also conscious still of the USD’s tendency to strengthen into year-end. We think any additional USD gains in the next few weeks will prove to be transitory.

UniCredit Research: The Fed releases the minutes of the policy meeting held on 19-20 September, when the FOMC decided to leave its target rate unchanged but announced the start of a gradual balance-sheet run-off. The post-meeting statement, as well as the updated interest rate projections and speeches over the past few weeks have all shown that, while the FOMC is closely monitoring inflation dynamics, the baseline outlook is for further gradual rate hikes. The minutes should echo this.   

Danske Research: FOMC minutes are likely to confirm that the Fed is on track for a December hike, although with the market pricing this in with around a 70% chance, it may not change expectations much. However, the minutes may reveal more about how the Fed’s balance between a stronger economy and still too low inflation is viewed. Previous minutes have shown diverging views with one camp (majority) trusting the Philips curve (lower unemployment leads to wage pressure eventually) while another camp is in favour of awaiting clearer signs that inflation is actually moving towards the Fed’s target of 2%. 

RBC Research: USD traded very well at the time of the September 20 FOMC and has mostly continued to do so subsequently as the meeting marked the start of the trend repricing of near-term rate prospects. With a December now fully priced in, however, further gains are more challenging.

SEB Research: The most interesting aspect of the minutes will likely be the discussion about temporary or structural explanations for the weak inflation and the Fed’s view of the Phillips curve’s association between a tighter labour market and rising inflation... The minutes probably will provide little new on the balance sheet normalisation.