The dovish statement and the soft inflation read may see Fed hawks having to wait for a few more meetings.
Some main points from the minutes
‘Most members judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point". This is a hawkish statement, and one that was accidentally leaked 24 minutes before the 2pm scheduled release. It caused a USD spike and clearly states a hike(s) is/are coming.
‘The ongoing rise in labour demand still appeared not to have led to a broad-based firming of wage increases’. A neutral statement, but considering the Fed has been vocal at the labour market slack thinning, it would suggest a hike bias.
Foreign market concerns were not a major issue, as members saw ‘Greece diminishing’ and China concerns appeared to be ‘limited’. Some did note, however, a material slowdown in China would create an issue for the US. This is neutral, however, the July Fed meeting was before the yuan currency devaluation and further signs of an economic slowdown in China. The statement is therefore obsolete considering the events that have come to pass.
Growth forecasts were altered and employment forecasts were in with the June numbers. The inflation forecast was revised down, due to crude oil prices. Medium-term estimates for productivity and growth were trimmed slightly, and the unemployment rate was lowered slightly. This is a mixed bag; employment is hawkish, while growth and inflation is dovish.
‘Almost all’ members need more ‘evidence’ before feeling ‘reasonably confident’ that inflation would return to the Committee's longer-run objective – a major precondition for a lift-off. This is a dovish statement, and the statement that most likely led to a sharp intraday reversal in the S&P (upside) and the USD (downside).
Where did the inflation go?
At the same time as the minutes, US CPI was released and it was clearly weaker than expected. Month-on-month growth of 0.1% on core and head line numbers is anaemic – it backs the final point in the minutes, and it is hard to see where inflation is going to come from in the interim as oil plummets.
Inflation expectations in the bond market is down almost 40 basis points from the July meeting. The Fed funds futures are now pricing in the expectation of a September hike at 36%, from 48% last week and 52% the week before. Wage growth is very, very flat. That, coupled with the inflation reads, gives a clear bias to holding the status quo next month.
The market dilemma
Intraday trade on the back of the US data saw a slight relief rally post ‘full’ release of the minutes – the USD loss ground against a basket of currencies, and the S&P recovered some of the ground lost in the morning session.
However, there will come a point where ‘holding the line’ will be seen as a negative. Questions about long-term sustainability in the economy will rise, and questions about long term policy positions and if it has or will work(ed) should be expected. That will mean that although inflation is likely to see a ‘hold’ in September, a rate hike is still very much expected in 2015.
Ahead of the Australian open
Earnings season remains above average, with corporates beating estimates 50% of the time on the revenue line and 56% on the EPS line. What is also mildly pleasing is that earnings growth is currently sitting at 3% compared to the estimates heading into reporting season of 1%.
There is now a ‘cheapness’ in the market due to the macro-storms that are affecting global markets. When that settles down, longer-term investors are likely to bid up the market.
However, after yesterday’s positive bounce-back, today is likely to see a downside after the leads from the Street. We are calling the ASX down 0.6% to 5347, however the comfort here might be the fact that the ASX is ahead of the global market. Having underperformed for the past week, it might moderate a heavier loss.