The guys over at Newsquawk have given me permission to share their FOMC preview which is usually for their paying subscribers.
Easily one of the best previews out there.
**Note, they don’t give opinions or predictions – Just the facts on the situation, completely unbiased.
Preview: FOMC rate decision due Wednesday 1st February at
19:00GMT/14:00EST; Press conference at 19:30GMT/14:30EST
OVERVIEW: The analyst consensus sees the FOMC lifting its
Federal Funds Rate target by 25bps to 4.50-4.75%, with a small minority noting
the potential for a larger 50bps hike increment. Money markets are pricing the
smaller move with almost certainty, but further through the year, are
underpricing the December SEP-implied terminal rate of 5.1% and are even
pricing risks of Fed easing at the back half of 2023. Chair Powell is likely to
stay the course around the fight against inflation not being over and the
“higher for longer” policy stance, guiding to more hikes in the
future despite the latest encouraging disinflationary data, but it’s seen as
unlikely that any efforts to jawbone tighter financial conditions will be
successful barring a change in the data, with markets themselves in
data-dependency mode. Meanwhile, Powell may provide the Fed more optionality to
cater for a ‘soft landing’ by leaning into recent Fed Speak regarding the
potential for disinflation absent a meaningful rise in unemployment.
STATEMENT: The Fed is priced with almost certainty for a 25bps
hike to take the FFR to 4.50-4.75%, with a less than 5% chance of a 50bps hike
implied by money market pricing. The statement is expected to be updated to
reflect the deceleration in the hiking pace and acknowledge the cumulative
tightening already in place. With speculation building over whether the Fed
will follow through with its guided rate hike path to 5.00-5.25%, it’s worth
keeping an eye out for any adjustments to its line that “ongoing increases
in the target range will be appropriate”, albeit it’s probably a bit
premature.
POWELL: The Fed Chair is likely to reaffirm the party line
of more work needing to be done on inflation. He likely highlights the
promising string of declines in the inflation data, but also warns that it is
still far above the 2% target, whilst expressing concerns over the stubbornly
high services inflation. Perhaps more interestingly will be if Powell warms
further towards the possibility of falling inflation without the need to cool
the labour market. Members of the Board, from dove Brainard to hawk Waller,
have recently alluded to the possibility of such. So, if Powell looks to cement
that line of thinking, that the Fed doesn’t require rising unemployment to
bring inflation back down, recession risks/pricing are likely to reduce
greatly, something that could be a driving factor in the recent pick-up in
stock appetite given the data lately has evolved in favour of a ‘soft landing’.
DATA: Core PCE Y/Y has now declined for three consecutive
months, sitting at 4.4% in December, and down from cycle peaks of 5.4% in
February 2022, building belief that the peak may be in. A lot of that decline
has been spurred by falling goods prices, masking the continued strength in the
services sector, particularly core services ex-housing, which many Fed
officials keep pointing to as an area that needs to be addressed. That decline
has also come against the backdrop of initial jobless claims reaching 9-month
lows and limited progress in JOLTS job openings falling to support a loosening
in the labour market, but at the same time, wage growth data has shown some
signs of cooling, with Tuesday’s Employment Cost Index for Q4 a key focus after
the promising wage data in the BLS employment report. Meanwhile, fears over an
imminent recession have abated, with US GDP rising again in Q4 (+2.9%), and
despite the dip in November and December real personal consumption, as well as
December retail sales, real-time credit card data has picked up again into
January and earnings commentary has been sanguine on the consumer.
