Jul 27, 2016 - noted, market data is from Janney Fixed Income Strategy & Research (Janney FIS). This report is the i
FOMC COMMENTARY JANNEY FIXED INCOME STRATEGY JUL 27, 2016
Key Points: • The FOMC held unchanged its target for overnight interest rates at a range of 0.25 – 0.50%, where it’s been since Dec. • Economic language in the policy statement was gently more hawkish, both in terms of job growth and in terms of inflation • Our expectations are for a December next rate hike, but a lot of economic data has to cooperate to make that a reality • The BoJ meeting results, due overnight Thurs/Fri, is far more important for global financial markets than is the Fed Commentary: Treas.
2.15PM 1.45PM
Chg.
3mo
0.29
0.29 +0.00
2yr
0.75
0.73 +0.01
5yr
1.13
1.12 +0.01
10yr
1.53
1.53 +0.00
30yr
2.24
2.24 -(0.01)
3m/2s
46
45
2s/10s
79
80
+1 -(1)
2s/30s
149
151
-(2)
3% 2% 1% 0% 0y MBS
10y
20y
2.15PM 1.45PM
30y Chg.
FN 3.0
103-20
103-20
0
GN 3.0
104-16
104-16
0
The Federal Open Market Committee held overnight rates unchanged at their July meeting, as we and every one of the economists/strategists in the Bloomberg survey projected. Market-implied hike probabilities were actually as high as 1 in 10 heading into the announcement, though that’s likely the effect of offside pricing from bets back in May, when the theme “prep in June hike in July” seemed to gain traction. Today marks the fifth consecutive hold after the first rate hike in nine years, but we’re betting that there’ll be another this year, most likely in December. Markets were pricing a roughly 1 in 2 chance of a hike by December, and that number isn’t likely to rise all that much further. Of course, a lot of economic and apparently financial market data have to play ball between now and then—not the least of which is stability of the dollar—for any action on the part of our decidedly tentative central bank. The good news is that, since the last time the FOMC met six weeks ago, most economic variables have improved, or at least held steady. You’d be forgiven for not noticing that little factoid amidst the global doom and gloom brought about by the Brexit vote (ultimately uneventful for all but the currency markets), European terrorism attacks (a real tragedy), and the screaming rhetoric of a rather heated political season (no matter what side of the aisle you’re on). But, after that donkey kick in the head of a May jobs report, job creation bounced back to a +149K average between May and June. And incoming inflation data has proven stable, with five year forward fiver year inflation breakevens holding at 1.93%, a few basis points above where they settled before the June FOMC meeting. Financial market conditions feel bubbly to many, but regardless of feel, credit spreads have generally tightened and the S&P 500 has climbed a wall of worry to reach fresh all-time highs in the last week. About the only financial conditions issue one might point to as a cause of concern is the puzzling front-end LIBOR spread widening triggered by a big uptick in demand for dollars. Money market reform coming in October only goes so far in explaining that phenomenon, since it’s also evident in the big pay up foreign institutions are paying via currency swaps to access dollars. There are subtle hints that this drive for dollar could be, and emphasize could, the result of funding pressures at unspecified overseas financial institutions. Regardless, all of that is a far cry from the run-over-by-elephants feeling that market participants faced in the week after the Brexit vote. Heading into today’s FOMC statement, we commented in our FOMC Preview that the most likely changes were an upgrade to jobs language and comments on inflation stabilization. That was indeed the case in the language. Officials added replaced caution on the labor markets with “Job gains were strong in June following weak growth in May,” patently obvious to anyone with a newspaper. On the inflation front, the FOMC also address the stability of inflation expectations, noting that “Marketbased measures of inflation compensation remain low,” but, by extension, also haven’t been falling as they were in June. The most significant addition to the economic statement language is the addition in the second paragraph of the statement that “Near-term risks to the economic outlook have diminished.” That point is crucial in the near term for the Fed’s economic forecast distribution, and probably reflects the markets’ benign response to last month’s Brexit vote (and accompanying financial condition easing). With a narrower forecast distribution, policymakers—in theory at least—can be more confident in taking actual tightening action, though, at risk of sounding like a teleprompter on repeat, it’ll take a lot of things to go right between now and December to actually execute that hike.
GUY LEBAS
Immediate market response had the yield curve flattening very modestly, with the front end rising 0 – 1 basis points and the ten year and out portion of the curve coming in 0 – 1 basis points. The Japanese Yen briefly took out 106 and settled around 105.80 from 105.63 immediately before the release, a small weakening. Why include this data point? The JPY has been the only leading indicator for risk and rates markets in the last month, and has accounted for 38% of period-ahead US interest rate moves. While the Fed is one driver of that currency pair, the far more significant one is the BoJ, and their decision that will cross the tapes Thursday night, when most of our dear readers will hopefully be asleep. Sweet dreams.
CHIEF FIXED INCOME STRATEGIST
[email protected]
215.665.6034
JANNEY MONTGOMERY SCOTT www.janney.com © 2016 Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC
Janney may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication. Unless otherwise noted, market data is from Janney Fixed Income Strategy & Research (Janney FIS). This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent. This report is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. For investment advice specific to your situation, or for additional information on this or other topics, please contact your Janney FC and/or your tax or legal advisor.
FOMC COMMENTARY JANNEY FIXED INCOME STRATEGY JUL 27, 2016
Release Date: July 27, 2016
Jobs gains were now “strong,” a reversal of deteriorating labor markets noted in June
Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Lower “near-term risks to the outlook” narrows Fed’s economic forecast range, making future hikes more acceptable
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
Eventually, the FOMC will get tired of the copy, paste exercise, but not this month
George dissented to the hawkish side again, after skipping June
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
GUY LEBAS
CHIEF FIXED INCOME STRATEGIST
[email protected]
215.665.6034
JANNEY MONTGOMERY SCOTT www.janney.com © 2016 Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC
Janney may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication. Unless otherwise noted, market data is from Janney Fixed Income Strategy & Research (Janney FIS). This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent. This report is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. For investment advice specific to your situation, or for additional information on this or other topics, please contact your Janney FC and/or your tax or legal advisor.
