Deutsche Bank: “If The Fed Stick To Their Script Then The Market Could Be In For A Small Shock”

Deutsche Bank: “If The Fed Stick To Their Script Then The Market Could Be In For A Small Shock”

Tyler Durden’s pictureSubmitted by Tyler Durden on 01/28/2015 08:08 -0500

The only preview you need of today’s first FOMC statement for 2015, one which has already cornered Yellen as any additional USD strength from here on out will certainly be economy and S&P500 negative, and who as Deutsche summarizes is damned if she does, and damned if she doesn’t, and that as Jim Reid politely puts it, “something will have to give at some point.”

From DB’s Jim Reid:

One wonders how careful the Fed will be in 2015. We may get some early clues today after the conclusion of the first FOMC meeting of the year. This meeting isn’t going to see the release of the Fed’s Summary of Economic Projections, nor a press conference but nevertheless it will be interesting to see the Fed’s January statement. DB’s Peter Hooper expects that the Fed will use this meeting for some “necessary housekeeping? with just a few small language changes as he thinks the economic picture has changed moderately but not enough for any significant changes to be made. To sum up, Peter expects the statement to be much like December’s in which the Fed’s message was that as long as the labour market continues to show improvement and they continue to project inflation returning to 2% over the next few years (as indicated in their December forecast) the lift-off for Fed rates could begin around the middle of this year. Peter takes this to mean sometime between June and September and most likely June so long as (1) core PCE inflation falls at most another tenth or so in the near term, (2) wage inflation is showing signs of rising, (3) survey measures of longer term inflation expectations are holding firm, and (4) employment and unemployment continue on their recent favourable trends. He thinks that if core inflation drops by several tenths this could push the first hike out a meeting or two.

If the Fed stick to their script then the market could be in for a small shock. Market-based measures of the first Fed hike place it at around the October meeting. This is already one meeting later than was being priced in at the start of the year. After this the second hike is priced in for around March 2016, whilst we entered the year pricing in the second hike for December 2015. So there is room here for volatility as we approach the summer FOMC meetings if the Fed’s message remains unchanged. It has long been our view that the Fed will struggle to hike as soon as it wants to given global growth and inflation issues, however there’s no doubt they are keen to pull the trigger so something will have to give at some point. So any evidence either way today will be interesting.

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