Group Economics
Daily Insight
Macro & Financial Markets Research Maritza Cabezas & Nick Kounis, +31 20
Three scenarios for the Fed
343 5618
17 September 2015
We expect the Fed to keep rates on hold, but to continue to signal a rate hike this year Such a scenario would be relatively benign for financial markets We sketch out a more negative scenario (a 25bp hike) and a positive one (signal of no hike until 2016)
Fed to keep rates on hold on Thursday
Expectations for the fed funds rate % mid-point
We expect the FOMC to hold fire on Thursday. In the run-up to the meeting, the economic data released has been positive on many fronts, including the labour market, consumption and overall GDP growth. Although inflation and wages have been below expectations, the pace at which the slack in the labour market has been diminishing suggests that both could
2.0 1.625 1.6
0.4
recent turmoil in financial markets associated with downside
0.0
better assessment. The impact of this on the Fed forecasts will
0.865 0.625
0.8
accelerate in time. Perhaps a larger concern for the Fed is the risks to EM growth. The Fed will probably want to wait to get a
1.4
1.2
0.4
0.29
Markets
Fed (June forecast) 2015
ABN AMRO
2016
be reflected in the dot plot. Source: Bloomberg, ABN AMRO Group Economics
Dot plot will signal liftoff and pace of hikes During June’s meeting, the outlook for the feds fund rate, the so called “dot plot” has forecasted that in 2015, the midpoint of the target range was 62.5bp, but with some dispersion. Seven from the seventeen members had forecasted a first rate hike in 2016 or later. In order for the rate hike to take place this year, we expect FOMC members to converge to the range of 0.5% and 0.75%. If this does not occur it is a clear sign that the rate hike is postponed until 2016. With respect to the path of
Scenario 1 - Benign – Our base case, where the Fed keeps interest rates on hold but signals that a December move is still on the table should be modestly positive for Treasuries and equities, but slightly negative for the US dollar. This is because markets attached only some possibility of a move on Thursday (around 30%). The reaction should be tempered by the signal that a hike is still on for this year.
interest rate normalization, the dot plot will likely emphasize a slow pace of rate hikes in 2016, with a lower midpoint that that which was communicated in June (162.5bp). This is in line with our forecast of a target range of 25-50bp in December and ending at 125bp-150bp at the end of 2016. Chair Yellen’s press conference will give more information on the reasons for
Scenario 2 - Negative - A rate hike already on Thursday would be an initial negative for Treasuries, equities and gold, but positive for the US dollar. The FOMC could cushion the blow in such a scenario if it convincingly communicated that the next rate move was some way off.
delaying the rate hike from September to December. Scenario 3 – Positive – The most positive scenario for Investors expect December rate hike At the forefront of this rate tightening cycle, investors have been skeptical about the Fed hiking rates in the short term, mainly given the uncertainty around the global economy. Markets expect a probability of almost 70% for a rate hike in December. Communication with markets will be crucial in this meeting to reduce the impact of the adjustment. Below we sketch out some scenarios and their possible market impact.
financial markets would be if the Fed left interest rates on hold, while hinting that the first rate increase in its target for the fed funds rate had been pushed back to 2016. Such an outcome would provide significant support for equities, Treasuries and gold, while weighing on the US dollar.
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Three scenarios for the Fed – 17 September 2015
Day
Date
Time
Country
Sunday Sunday Sunday
13/09/2015 13/09/2015 13/09/2015
07:30:00 07:30:00 07:30:00
CN CN CN
Monday Monday Monday Monday Monday
14/09/2015 14/09/2015 14/09/2015 14/09/2015 14/09/2015
06:30:00 09:00:00 11:00:00 14:00:00 15:45:00
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Retail sales - % yoy Industrial production - % yoy Fixed asset investment - % yoy
Aug Aug Aug
10.5 6.0 11.2
10.6 6.5 11.2
JP CH EC IN EC
Industrial production - % mom Foreign currency reserves - CHF mln Industrial production - % mom CPI - % yoy ECB announces weekly QE details
Jul F Aug Jul Aug
-0.6 531820 -0.4 3.8
#N/A N/A 0.3 3.6
0.4
10:30:00 11:00:00 14:30:00 14:30:00 15:15:00 16:00:00
NL GB DE US US US US JP
Government presents Budget 2016 CPI - % yoy Aug ZEW index (expectation economic growth) Sep Retail sales - % mom Aug Empire State PMI - Manuf. general business conditions - index Sep Industrial production - % mom Aug Business inventories - % mom Jul Annual rise in monetary base Sep 15
0.1 25.0 0.6 -14.9 0.6 0.8 80.0
0.0 17.7 0.3 -0.5 -0.2 0.2 80.6
0.0 10.0 0.4
16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015
10:30:00 10:30:00 11:00:00 14:30:00 14:30:00 14:30:00 14:30:00 16:00:00
GB GB EC US US US US US
Claimant count unemployment rate - % Change in claimant count - thousands Core inflation - % yoy Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy NAHB home builders' confidence index
Aug Aug Aug F Aug Aug Aug Aug Sep
2.3 -4.9 1.0 0.1 1.8 0.1 0.2 61.0
2.3 -5.0 1.0 0.1 1.9 0.0 0.2 61.0
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015
01:50:00 09:30:00 09:30:00 09:30:00 09:30:00 10:30:00 14:30:00 16:00:00 20:00:00 20:30:00
JP NL CH CH CH GB US US US US
Merchandise trade exports - % yoy Unemployment rate SNB 3-month ibor lower target SNB 3-month ibor upper target SNB Sight Deposit Interest rate Retail sales - % mom Housing starts - % mom Philadelphia Fed - business confidence - index Targe range for fed funds rate Fed Chair Yellen holds press conference
Aug Aug Sep 17 Sep 17 Sep 17 Aug Aug Sep Sep 17 Sep-17
7.6 6.8 -1.3 0 -0.75 0.1 0.2 8.3 0-0.25%
Friday
18/09/2015
09:30:00
NL
Consumer confidence - index
Sep
6
ABN AMRO
0.1 1.9 -0.1 0.2
6.8 -1.3 0 -0.75 -4.5 5.9 0.25-0.50%
-4.0 7.0 0-0.25%
7
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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