October FOMC Meeting Preview

Summary Outlook: On Wednesday, October 30th at 14:00ET/18:00GMT, the FOMC concludes their 2-day meeting and we do not anticipate any major changes to monetary policy (0-0.25%) or the Fed’s current $85B a month pace of Quantitative Easing – $45B of Treasuries and $40B of Mortgage-backed securities (MBS). Accordingly, the markets will likely focus on the tone of the FOMC statement and for any potential indication on what may cause a change in the size, pace or composition of the Fed’s current asset purchases.

We anticipate a few tweaks to the FOMC statement, since recent economic data has deteriorated from the previous meeting, namely due to the fiscal challenges brought on the US government. Should we see these modifications, it would most likely come in one of the following areas from the September statement:

Economic activity – “has been expanding at a moderate pace”
Labor market – “conditions have shown further improvement in recent months”
Housing – “sector has been strengthening”
Inflation – “has been running below…objective”

Additionally, tomorrow morning we will get a look at ADP’s US October Employment change (consensus: +150K) as well as the US September CPI, which is anticipated to slip to +1.2% YoY from +1.52% YoY in August – Thus, these data points may aid the Fed in their assessment of the economy and could have an impact on their statement. That said, the labor market has already moderated since their last meeting, as September's Nonfarm Payrolls rose by merely 148K jobs and the prior monthly revisions were mixed, with August increasing by 24K and July seeing a subtraction of 15K (net revision +9K), which brings the 6-month average to 163K. This is problematic because rather than improving, the US labor market is underwhelming analysts estimates and this makes it increasingly more difficult for the Fed to begin tapering QE. Even if this were not the case, it would still make little sense to taper asset purchases at the October 29-30th FOMC meeting simply because if the tapering decision is in fact data dependent, then one data point should not meaningfully alter the Fed’s view of the economy enough for them to take action. Additionally, this meeting is not associated with a summary of economic projections or a press conference by Chairman, which in itself could be a hint that the Fed is unlikely to take action since Bernanke cannot explain the committee’s rationale of any measures.

Furthermore, by keeping the status quo the Fed would actually gain not one, but two, looks at the US employment report prior to their next meeting in December – the October Employment report next Friday and the November report on December 6th. Even then, while a December Taper is possible it appears highly unlikely that the data would support such a decision. Moreover, US fiscal uncertainty will be prevalent once again and this leads us to believe a March 2014 QE Taper is most probable since it could be Janet Yellen’s first meeting as Fed Chairman and it will be associated with a summary of economic projections & press conference.

Market Forecast: Our primary scenario is for the Fed to remain on the sidelines, as such it may see a rather limited reaction in risk assets and the dollar. Additionally, the release of top-tier US economic data earlier in the day – Oct. ADP Employment Change and Sept. CPI as well as potential month-end flows could muddy the waters. This potentially sets the stage for an increased amount of volatility and we think it’s possible for the market to get whipsawed. Technically, the US Dollar Index found support around 79.00, which saw the convergence of previous 2013 lows and longer-term channel support, and has begun to recover. That said, should it break below 78.70 (50% retracement of 2011-13 rally) then we could see a more prolonged USD decline – See Dollar Index testing key support zone for more on this.

Source: Forex.com

30.10.2013