FOMC Minutes Say It's Coming Home

July 08, 2021 • Estimated Reading Time: 7 minutes

Straight from the horse's mouth:

OK, maybe they didn't say that.

There was something for everyone in the minutes though.

Think the Fed won't be tapering/tightening for a while yet?

Focus on the bit about 'substantial further progress' not being met yet.

Think the Fed need to get ahead of inflation and tapering is imminent?

Focus on the bit about 'conditions for tapering likely to be met sooner than anticipated at previous meetings'.

My take?

The last meeting was a good opportunity to communicate that they won't let inflation get out of control.

There is still a huge amount of uncertainty in the economy (and on the committee).

The minutes mentioned that the data is not goving clear signals on underlying momentum.

Taper talk will continue to be drip fed to the market for expectation management.

Jackson Hole in August will be the earliest opportunity to communicate this intention.

As long as inflation remains anchored, there is no need to rush.

Bostic was speaking at an event an hour after the release and said that the Fed’s tapering of monthly asset purchases would be “gradual” when it deems it appropriate to commence scaling back its COVID-era, easy-money policies.

He also said that said that the Fed was paying attention to the troubling delta variant of COVID-19, which he cautioned could slow the U.S. recovery, causing consumers to pull back and hamstring economic reopenings that are gaining stride.

China are easing policy (for SME's)...

The government held a regular meeting and decided to cut the targeted reserve requirement ratio (RRR) for small and medium enterprises (SMEs) when necessary, it also didn't rule out other monetary policy tools to help SMEs.

We believe that such a cut will come soon.

The cost pressures of SMEs mostly comes from high commodity prices, although the Chinese government has already acted to reduce commodity prices using both market-based and administrative measures.

Possible impact

There are a number of impacts from a possible targeted RRR cut:

  • Weaker CNY against USD as the targeted RRR cut is in contrast to Fed talk of taper and rate hike timing. This could be reflected in today's market moves.

  • This policy could be temporary when announced and possibly reported together with a timeframe or conditions.

  • SMEs in China should be able to get more loans from banks at lower interest rates after the targeted RRR cut is announced. But banks' credit policy for SMEs is not expected to be relaxed.

  • Some SMEs might be less willing to go for micro-loans offered by fintech platforms, which were the usual channel SMEs got financing from due to their more relaxed credit policy compared to banks for SMEs even though they charge higher interest rates.

  • A cut of targeted RRR for SMEs only lowers the cost to banks if they lend to SMEs. That means not all SMEs can get loans from banks even if there is a targeted RRR cut. Some SMEs would continue to operate in difficult conditions.

  • Overall, SMEs survival rate could increase moderately, and this could help stabilise jobs and economic growth

BBG

Meanwhile, central bank vice governor Fan Yifei told media on Thursday that China will continue to push real lending rates lower, and reduce financing costs for small companies through targeted monetary policy tools.

More targeted easing may be likely. Zhang Yu, chief analyst at Huachuang Securities, noted that the RRR cuts floated by the cabinet are meant to support smaller firms, which have continued to lag a broad economic recovery this year.

“Small and micro enterprises are now facing a triple squeeze -- poor domestic demand, rising raw material prices on the supply side, and a marginal tax increase as a result of a waiver of reductions in social security fees,” she said.

Sentiment hasn't been great in Asia.

Chinese tech still under pressure from regulators, and Japan plans another state of emergency and a ban on spectators at the Olympics.

Not much on the calendar today:

  • ECB Minutes will be released at 13:30BST

  • ECB is to announce results of its Strategy Review at 12:00BST and President Lagarde plans a press conference at 13:30BST. Other reports noted that the ECB is to allow for some overshoot of new inflation goal and is said to agree to set its new inflation goal at 2%. (Newsquawk)

  • Weekly jobless claims

The OPEC+ deadlock continues and the Saudi oil minister supposedly sees no chance of another meeting before August.

API data showed another large decline in U.S. crude stocks, well above the 3.925 million expected...

TE

DoE report is due at 16:00BST

EUR/USD 1.1685-90 (350M), 1.1700 (896M), 1.1775-80 (400M), 1.1800 (946M), 1.1855 (303M), 1.1875-80 (500M), 1.1930-45 (1.8BLN)

USD/JPY 110.50 (345M), 110.75-80 (600M), 110.95-00 (655M), 111.25 (570M), 112.00 (410M)

EUR/GBP 0.8475 (250M), 0.8535-40 (320M), 0.8600 203M), 0.8625 (456M), 0.8660 (300M)

GBP/USD 1.3850-55 (450M)

AUD/USD 0.7350 (440M), 0.7400 (320M), 0.7500 (233M), 0.7530 (901M), 0.7600-05 (900M)

NZD/USD 0.7200-05 (240M),

AUD/JPY 0.8230 (320M)

USD/ZAR 14.45-48 (250M)

USD/CHF 0.9225-30 (400M)

EUR/CHF 1.0910-20 (480M)

Source: DTCC