Macro 7 minutes to read

FOMC: Goldilocks or wake-up call?

Steen Jakobsen

Chief Economist & CIO

Summary:  Consensus is calling for a dovish tilt from the Federal Reserve with investors banking on a risk-on push. Saxo, however, sees no change and an IOER cut resulting in a small risk-off move and a correction inside the present bull market.


• Saxo sees no change and an adjustment (cut) of the Federal Reserve Interest rate on Excess Reserves of five basis points.

• The market is looking for a dovish tilt to support the economy through lower Fed projections.

• Saxo is more concerned about future growth than inflation, but this is not part of the consensus agenda.

• If consensus is right: risk-on (long US equities, higher EURUSD).

• If Saxo is right: small risk off – a correction inside the present bull market as technical and valuations are extremely stretched, particularly relative to economic data and earnings.


The focus will be on deflation after weak readings on PCE and the GDP deflator. It’s sometimes lost on the market that the mandate for the Fed is “price stability” – and stability means prices levels that do not hurt business and economic activity.

A 1.5% inflation reading is hardly any real reason for concern as the near-totally random target of 2% is not at risk for now, but expect some wording to address this from the FOMC – both on the inflation shortfall, and also in the press conference questions regarding the IOER versus the Fed Funds rate.

We see inflation ticking up as we firmly believe that energy is 90% of the inflationary direction. With energy trading at the high end of recent ranges, expect higher (not lower) headline inflation; this is something the 5Y5Y inflation swaps reflect nicely.
WTI crude (USD, y/y change) versus CPI (source: Federal Reserve Bank of St. Louis)
The collapse of energy prices from $86.70 in early October 2018 has translated into a soft period for inflation as seen here via the y/y drop in WTI crude oil. It’s now again moving towards positive, and past October it will move significantly higher.
US Inflation Swap (5Y5Y) versus CPI (source: Federal Reserve Bank of St. Louis)
Despite all the talk of deflation, the 5Y5Y as a proxy for future expected inflation has continued to move higher. We see this continuing as Congress discusses infrastructure spending and President Trump continues to support all manner of Modern Monetary Theory variants.

Saxo is more concerned about the growth outlook than deflation despite the “strong” Q1 data point. Most of the excess performance came from the current account (+100 basis points) as trade was impacted by the expected China-US trade deal set to end by March 31.

The Chicago Fed National Activity Index, or CFNAI, is our best proxy for actual growth in the US economy... and the signs are not good. We are operating under our new macro theme of False Stabilisation, which argues that great policy panic of early 2019 created a response in the form of of lower steering rates and yields, but that these are transitory in a world of no reforms and most central banks seemingly at a loss for new policy (and continuing with QE and variants thereof).

We continue to think the market is in a sideways formation after the strong run-up in Q1. We see the next risk infliction point coming in July/August where enough time will have passed for the market to realise that improvement in economic activity is not forthcoming, particularly not from a policy response of lower funding costs. That timeline also, and notably, moves us past the conclusion of the China-US trade deal.

Our risk outlook is neutral with a small overweight in long-term US fixed income relative to cash.

For more information about the FOMC decision, click here.
Click here for an excellent update from briefing.com (chart and introductory analysis below).

Source: Briefing.com
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