03.03 Weekly Viewpoint : The FOMC has guided expectations towards a fed funds rate hike in March.

Expectations for the outcome of the FOMC meeting of 15 March have been guided in the past week by a torrent of speeches by FOMC participants, which signalled increasing consensus for a rate increase at the next meeting, pushing up the probability of a move in March to well over 80% (Bloomberg estimate)……


Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy 


Intesa Sanpaolo – Research Department For professional investors and advisers only


The minutes of the January meeting had already sent hawkish signals , indicating that a rate hike was considered appropriate “fairly soon”, i.e. at “one of the next three meetings”, and that the March meeting was “live” for a move. The speeches of the past week have thrown open the door for an impending rate hike, to come even sooner than implied by the “fairly soon” expression reported by the minutes. FOMC participants agree on the fact that the Fed’s mandate goals are at hand and that risks are “broadly balanced”. Indeed, Brainard specified that risks “are as close to balances as they have been in some time” (1 March 2017). As we write, out of 17 FOMC participants, 11 have made statements that may be interpreted as supporting a hike in March. According to Dudley (NY Fed) “the case for monetary policy tightening in March has become a lot more compelling”; Williams (San Francisco Fed) said that a hike in March will receive “serious consideration”; several others have said they would consider an increase appropriate “sooner rather than later”, including some of the more dovish FOMC members. Brainard (Board), a well-established dove, said that “it will likely be appropriate soon to remove accommodation”. Later today (3 March) following the release of this publication, three Board members are due to speak (Yellen, Fischer and Powell), and will probably confirm and round up the message that has emerged over the past few days. Four regional Fed presidents are also due to deliver speeches. Powell has already said that the case for a March increase “has come together”. In the worst case, there could be at most two participants potentially opposed to a rate increase (one is Kashkari, who is very likely to dissent). Opinion dispersion within the FOMC is extraordinarily low compared to recent standards, and in our view indicates that the probability attached by the market to a move in March is appropriate.  

What is the reason behind the shifting opinions in the FOMC?

There is widespread consensus within the Committee that rates are on an upward path. The decision to make is “when”, not “if”, to increase the fed funds rate at one of the coming meetings.

There are three major factors at play, two of a domestic nature, and one international:

1) the evolution of data and of the economic outlook;

2) developments for fiscal policy and other policies expected of the new US administration, and

3) the evolution of the global scenario.

The indications provided by the domestic and global scenarios seem favourable, with signals of an acceleration in growth and upside surprises from data. For what concerns fiscal policy and the new US administration’s other policies (trade, deregulation), the judgment is still suspended in the absence of details on the reforms. It is increasingly likely that a potential increase in fiscal stimulus will reap no effects before 2018, and may be mitigated by mixed actions on the front of trade, and by a strengthening of the dollar tied to the potential territorial correction of corporate taxation. However, for the time being these indications are not in conflict with the growth trend.

One important factor supporting the case for an immediate hike is that economic and financial conditions are in place for a move in March. The markets reacted to the flow of communication from the Fed without tantrums, neither on yields nor on the dollar, whereas the stock market continues to break new records on expectations that the new administration’s policies will benefit earnings. In the next few months, setbacks are possible due to data (weak 1Q), potential difficulties encountered by the administration, or to the announcement of protectionist policies. The markets may also be back in play with higher volatility (exchange rate fluctuations if the probability of border adjustment increases with the tax reform). In the months ahead, conditions could become less favourable for an interest rate hike, considered appropriate in any case by the end of June. Data and information on the evolution of the reforms will remain dominant in guiding subsequent hikes. In the meantime, a 25bp rise will probably be stowed away in March.


Appendix
Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld.ch