According to analysts from TDS, the market is extremely well priced for a June rate hike next week from the Federal Reserve and they see that the FOMC will not disappoint. They expect the 2018 median dot to remain at three hikes for the year, with the dispersion in subsequent years to remain high.
Key Quotes:
“Risks are largely balanced, but another non-committal press conference from Powell could leave uncertainty elevated. A drift up in the 2018 or longer-run dots, or emphasis on hiking beyond neutral this cycle, would be seen as hawkish. Conversely, discussion of trade concerns or decelerating global growth would be viewed dovishly, as would additional support for a protracted inflation overshoot.”
“The updated forecasts may reveal a few mark-to-market revisions, particularly a still-lower path for the unemployment rate this year and next. Markets are likely to key in on the dot plot, where we expect the median 2018 dot to remain unchanged for three hikes in total this year. Note it would only take one more optimistic Fed official to shift the median to four hikes this year; while this remains a risk for June we do not see an obvious candidate among recent speakers.”
“The Fed meeting comes in the midst of a very eventful and perhaps one of the most pivotal weeks of the calendar year yet. Indeed, this will feature the G3 central bank decisions and a number of potentially significant political shifts (Brexit, Swiss referendum, NK Summit, G7 Summit). Assuming that political developments ahead of the decision do not roil markets, we think the Fed’s inflation overshoot tolerance, current market pricing and unexpected change in the dot-plot leaves the USD largely unperturbed to a widely expected rate hike.”
“We think the USD is more inclined to trade with a weaker tone in line with our rates expectation. The broad USD has largely traded with a tight correlation with global rate spreads. This may be waning, however. Relative data momentum has begun to show signs of an uptick. This suggests that markets could be making a return to a “macro convergent” narrative.”
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