Morning Call: Will they, won't they?
Our Saxo Strats experts discuss the state of play in global financial markets on a day where the US Federal Open Market Committee might – or might not – announce an interest rate hike.
Singapore Sales Trader
Summary: Pay close attention to the Fed voter dynamics as this could have nearly as big an impact on the markets as the US-China trade tussle and US twin deficits.
After a long period in which increased flattening of the US yield curve drove predictions for a recession in 2019 when inversion becomes reality, the presumed inevitability of this flattening is now attracting more scrutiny. One can argue that the relative insulation from trade war ill-effects of US growth outperformance, rising wages and US corporate earnings is driving the markets to a pivotal point…or is it?
It is almost universally accepted that future Treasury issuances will expand in size (indeed, $230bn worth are up for auction this week) to fund the ballooning US budgets on the back of the Trump administration’s tax cuts. Until recently, the yield curve continued to flatten as the Fed’s rate hikes were read as the inevitable action of a central bank trying to inch closer to neutral territory while retaining a little ammunition for a sustainable rise in long end yields in the wake of still-tepid wage growth and a likely escalation of budget and trade deficits. But are we at a point where we must reprice the possibility of some sort of equilibrium being re-established in the tenure premium in the Treasury markets?
US 10yr-2yr spread
There are too many variables at play to be able to answer these critical questions with any conviction. But beyond the big issues of ballooning US twin deficits, an escalating US-China trade war and tax stimulus in the US peaking, there is another critical factor that drives yields and in turn the rest of the markets – FOMC’s policy trajectory. While all other factors get a lot of coverage in the markets, I find the Federal Open Market Committee dynamics to be grossly underreported and often without proper nuance in the financial media. For instance, a comment from Neel Kashkari (who is a non-voter and will be so again in 2019) gets the same label of Fedspeak as does Raphael Bostic who is a current voter. So, as we head to the turn of the year where another hike is expected in December and Fed’s dot plot is projecting three more hikes for 2019, it is as good a time as any to run through a Federal Reserve primer.
About the Federal Reserve
FOMC voters and their policy bias:
It is unfair and more importantly dangerous to label any FOMC member as a default hawk or dove as usually their stances are more nuanced and change dynamically over time. But for what it is worth, this is how they are seen in the larger perception of the markets right now:
Table of voters
|Board of Governors - Voters||Policy Bias|
|Jerome H. Powell, Board of Governors, Chairman||Neutral tending hawkish lately|
|Richard H. Clarida, Board of Governors||Neutral and relatively known|
|Randal K. Quarles, Board of Governors||Neutral|
|Lael Brainard, Board of Governors||Hawk (Used to be ultra dovish in 2016, but quite hawkish this year)|
|Vacant (Marvin Goodfriend, Senate confirmation pending)||N/A|
|Vacant (Michelle Bowman, Senate confirmation pending)||N/A|
|Vacant (Nellie Liang, Senate confirmation pending)||N/A|
|Voting Regional FRB Presidents - Voters 2018|
|John C. Williams, New York, Vice Chairman - Permanent member - also vote in 2019||Hawk|
|Thomas I. Barkin, Richmond||Hawk|
|Raphael W. Bostic, Atlanta||Dove turning Hawkish recently|
|Mary C. Daly, San Francisco||Dove|
|Loretta J. Mester, Cleveland||Hawk|
|Alternate Voters - Voters in 2019||Policy Bias|
|James Bullard, St. Louis||Dove (Was very hawkish in 2015-16 and has turned ultra dovish since)|
|Charles L. Evans, Chicago||Dove|
|Esther L. George, Kansas City||Hawk|
|Eric Rosengren, Boston||Hawk|