Release The Hawks!

June 17, 2021 • Estimated Reading Time: 11 minutes

Before:

After:

Dot plot comments in the preview:

That ratio might flip so that the median member sees rate hikes by the end of 2023 (10+ members).

After the last meeting rates markets a 'priced' a 100% chance of a rate hike in 2022.

Markets now see a lower chance of a hike in 2022 than they did in April.

That ratio did flip (and a bit more with the 2022 dots)...

Markets are back to pricing that 2022 hike at 100% and there's no doubt that this meeting was a shock to many.

(Not me though, I saw it coming of course, totally expected it, I just didn't tell you because...)

I've checked the handbook for what I'm supposed to do in this situation...

Ten Rules - Dario Perkins

But they're not making a policy mistake, nor are they behaving erratically.

Powell emphasised that the dots should be taken with a high degree of scepticism, and no change in policy was announced.

But the market view HAS shifted.

When better to introduce some hawkishness?

Heading into the meeting even junk bonds were yielding less than inflation.

John Authers

Danske shared their key takeaways from the meeting 👇

This thread from PiQ has all of the key comments from the presser too

 🇺🇸🏦 FOMC -

🔹 Rates Unchanged

🔹 Int On Excess Reserves: 0.15% (Prev. 0.1%)

🔹 Fed Median view of Fed Funds rate at end of 2023 0.6% (prev. 0.1%); 7 officials see a hike in 2022 (prev. 4), 13 officials see a hike in 2023 (prev. 7)

~ @Newsquawk pic.twitter.com/djk2jRo3Pv— PiQ (@PriapusIQ) June 16, 2021 

The market response to the meeting was exactly as you would expect.

Stocks sold off, dollars were bought and yields rallied.

Gold was hammered as 10y real yields went from -0.87 to -0.75 in the aftermath.

But what next?

Nothing has meaningfully changed.

There's no rush to announce taper until August/September, and core inflation projected to continue around 2% while the labour market recovers is tolerable so there's no pressure to hike pre-emptively.

The GS forecast still looks pretty solid...

Yesterday I was pretty confident that this should be a risk on, sell USD outcome once the initial reaction was digested.  

If a dollar bear thinks EURUSD is heading towards 1.25, this move into 1.20 support is a great chance to load up...

Just like the Fed, my forecasts should be treated with a high degree of uncertainty... 😬

For now at least, markets have been in no rush to undo yesterdays damage.

In Australia...

A stunning 115.2k rise in employment sees the unemployment rate fall to 5.1%, below pre-Covid levels (Westpac)

  • Total employment jumped 115.2k (+0.9%) in May, well above our estimate of +30.0k, which was also the market median (the top of the range was a +60.0k). This pushes employment 1.0% above its pre-Covid (March 2020) level. Compared to April 2020 - the nadir of the Covid crisis - employment is up 5.8%.

  • This stunning outcome represents a snap-back from a softer period over the Easter holiday, and is also consistent with the robust outcomes seen in the leading indicators of employment, including job vacancies and the business surveys.

  • Employment gains were driven by full time, up 97.5k (the largest monthly increase on a revised history), with part time posting a 17.7k rise.

  • The participation rate lifted 0.27ppts, to 66.2% from a revised 65.9%, as people returned to the labour force after the holiday period. This largely offsets the 0.34ppt fall seen in the April labour force survey. We had been expecting a 0.3% rise in participation, but from the higher starting point of an unrevised 66.0%.

  • Total employment growth was strongest for females, +69.4k, with male employment rising 45.8k. We were looking for strength in female jobs, as there is a larger share of females who are marginally attached to the labour force compared to males, so the effect of family holidays (and the subsequent rebound) should be more pronounced amongst females. It is also telling that female participation jumped 0.4ppt compared to males at +0.1ppt.

  • With such a strong rise in employment, the unemployment rate fell to 5.1%. This pushes the unemployment rate below the 5.3% seen in March 2020 and is in line with February 2020 at 5.1%. Both the male and female unemployment rate fell sharply: males down 0.4ppt to 5.4%, and females down 0.5ppt to 4.7%. Female unemployment continues to trend lower than male unemployment, and unusual observation during a robust employment growth phase.

  • As expected, when employees return from the holidays hours worked rebounded 1.4% in seasonally adjusted terms, offsetting a 0.7% fall in April. This leaves aggregate hours worked up 2.9% compared to March 2020.

  • The fall in the unemployment rate was accompanied by a fall in underemployment, which was down 0.3ppts to 7.4%, the lowest level since January 2014. Underutilisation also fell 0.7ppts to 12.5% (the lowest level since Feb 2013).

Next RBA meeting is going to be 🔥

Very hard for them to credibly ignore this improvement in the labour market and say they won't withdraw support until at least 2024...

Quick note on CAD too

 BoC Gov Macklem: Recent Strength Of C$ Could Weigh On Our Projections, Could Cut Exports, And We Are Taking That Into Account— LiveSquawk (@LiveSquawk) June 16, 2021 

And more China news...

China’s home prices grew at the fastest pace in nine months in May as buyers competed for dwindling properties, even as authorities introduced more targeted curbs on the market.

New home prices were up an annualized 6.4% in May, versus 5.9% in April, rising much faster than secondary market prices (3.6%)

China is resorting to increasingly forceful measures to contain risks to the financial system, in moves that threaten to undermine President Xi Jinping’s pledge to give markets greater freedom.

Authorities have in recent weeks ordered state firms to curb their overseas commodities exposure, forced domestic banks to hold more foreign currencies, considered a cap on thermal coal prices, censored searches for crypto exchanges and effectively banned brokers from publishing bullish equity-index targets. A new rule will bar cash management products from holding riskier securities and limit their use of leverage. On Thursday, an official said China plans to sell metals from state reserves.

The assets to be offloaded are holdings in five financial units including a regional lender, a nonperforming assets trading company and a regional asset management company (AMC), sources with knowledge of the matter told Caixin. The seven companies hold a combined 700 billion yuan ($109 billion) in total assets.

Multiple banks in China are getting ready to reduce how much interest they offer on deposits, taking advantage of a reform that encourages them to lower the cap on deposit rates, sources with knowledge of the matter told Caixin.

The change comes as Beijing hopes to reduce banks’ funding costs so they can lower businesses’ borrowing costs, benefiting the real economy.

Looking ahead...

SNB: Keep rates unchanged at -0.75%, repeat mantra that the Franc is highly valued, will intervene as necessary etc.

Norges Bank: No rate hike yet, but coming soon according to Nordea...

We believe that the new rate path will show a first rate hike in September 2021 with a very high probability and also a fairly high probability for a second hike in December 2021.

Our view is that Norges Bank in the end will hike rates both in September and December as long as there are no big setbacks with the vaccination roll-out nor viral mutations that delay the reopening significantly.

Expect NOK will strengthen moderately when more hawkish message is delivered

CBRT: Nobody knows. Probably on hold for a while longer (Hiking rates gets central bankers fired, cutting rates too early gets markets panicking).

An early rate cut would not be welcome news.

Weekly U.S. claims/employment data could take on extra significance given Powells comments on a 'strong labour market recovery'.