FOMC minutes preview – tiptoeing toward the taper

FOMC minutes preview – tiptoeing toward the taper     

• USD: Citi analysts - the Minutes to the FOMC March 17th meeting (where officials raised growth forecasts but left plans to leave rates on-hold through 2023 unchanged), may provide insights on the path to tapering asset purchases (which Citi analysts expect to commence in Q4). Chair Powell has indicated in the post-meeting press conference that the pace of rehiring will be a key input to the decision to taper asset purchases. The Minutes this week may confirm if this is a broadly held view. The emphasis on job growth is particularly relevant given the 916K payrolls increase in March following an upwardly-revised 468K in February. Raising rates on the other hand, will likely depend on the outlook for US inflation – with most officials expecting higher inflation to be contained in 2021, but with markets and Citi analysts’ projections suggesting a more persistent overshoot of the 2% target.          

• USD: Investors will likely look for signs that better economic data will lead to policy action - the median Fed dots currently suggest no hikes before 2024. While more recent data including the 916K new jobs in March are unlikely to be reflected in the Minutes, investors may still read the Minutes from the context of a still-improving economy. There, FOMC may detail plans to get to the first rate hike – (1) Give guidance “well-ahead” of tapering asset purchases and begin discussing the specific conditions that would warrant the change - Citi analysts expect this at or before the June FOMC; (2) Determine the US economy has made “substantial further progress” and announce tapering of asset purchases - Citi analysts expect this to be announced at September or October FOMC; (3) Taper asset purchases from $120bln/mth to zero - in Citi’s base-case the Fed tapers $10bln/mth Treasuries and $5bln/mth MBS starting in December, meaning it takes eight months to July ’22 in the base case to fully taper, and (4) Raise the policy rate - Citi analysts pencil in a first rate-hike in December 2022.       

• USD: Inflation outlook matters more for the first rate hike - a full taper is very likely a necessary precondition for a first rate hike. However, that first hike will likely ultimately depend on the path of inflation. Most Fed officials still retain a base case for at-or-below target inflation outlook in 2022 but Citi analysts continue to see risks as balanced to earlier Fed action. Citi’s base case continues to be for a Q4’21 tapering of asset purchases and a first rate hike in late 2022. For this to occur US jobs growth will need to continue to average 500K+ (which it is currently) and core inflation to continue to overshoot 2.0% in 2022. As a result, upcoming US labor market data (which bears on the timing of tapering) and more persistent elements of US inflation like shelter prices (which bears on the eventual decision to raise rates) will be watched more closely.  

Data releases overnight

• USD: US ISM services for March exceeds expectations, reaching an all-time-high (since data began in 1997) of 63.7 with all 18 industries groups reporting expansion, driven by a surge in new orders from 51.9 to 67.2 and business activity from 55.5 to 69.4. Employment also strengthens – consistent with the strong jobs report – to 57.2 from 52.7 and supplier deliveries continue to slow at 61.0 as supply chain issues continue. Meanwhile, prices paid increase to 74.0 from 71.8 with all industry groups reporting expansion. Citi analysts expect Fed to begin tapering purchases in Q4 of this year.   

Week Ahead       

• USD: FOMC Minutes from March 17th – refer to the above piece “FOMC minutes preview – Tiptoeing toward the taper”. Other Fed speak this week includes President Evans discussing the US economic outlook, Kaplan in a panel discussion, Barkin and Bullard discussing monetary policy and the economy and Chair Powell taking part in an IMF panel discussion on the global economy.        

• USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.5%, prior: 0.5%; PPI Final Demand YoY – Citi: 3.7%, median: 3.8%, prior: 2.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 2.7%, median: 2.6%, prior: 2.5%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: NA, prior: 0.2% - Citi analysts expect a solid 0.4% increase in total producer prices, with a 0.3% increase in the core measure. Increased focus on PPI could come over the coming months, as producer prices are one of the first inflation measures to reflect higher prices related to capacity constraints or higher input prices seen in survey measures such as ISMs and PMIs.   

• AUD: Citi cash rate target forecast; +10bps, Previous; +10bps; Citi 3-year yield target forecast; +10bps, Previous; +10bps - Since the March meeting, the key upside surprise has been the labor market, with the unemployment rate falling to 5.8%, below the Bank’s year-end 6% forecast. The Statement will therefore likely acknowledge these better-than-expected outcomes, but also highlight that the end of JobKeeper in March means that there is still uncertainty on the labor market outlook. Citi analysts also expect the RBA to continue pushing back against sustained inflationary pressures and expect the Bank will likely provide a third-round of LSAP (asset purchases) with another $AU100bn worth of purchases from October onwards. Citi analysts also expect the RBA to retain its forward guidance that it is unlikely to commence raising rates until 2024 at the earliest.

• CAD: Canada’s Net Change in Employment (March) – Citi: 175k, median: 75k, prior: 259.2k; Unemployment Rate – Citi: 7.6%, median: 8.0%, prior: 8.2%; Hourly Wage Rate Permanent Employees – Citi: 1.7%, median: NA, prior: 4.3% - Citi analysts expect a strong 175k increase in employment in March following a ~260k job gain in February. This would put employment at its highest level since pre-pandemic employment levels, with around 425k jobs still lost compared to February 2020. Citi analysts continue to see risks for a faster normalization of employment levels than currently suggested by the BoC’s assessment of the labor market. Ahead of the April BoC meeting, this would likely make the Governing Council more confident that the economy can withstand a smaller degree of new monetary accommodation with smaller weekly asset purchases.          

This is an extract from the Daily Currency Update, dated April 6, 2021. Please approach a Citigold Relationship Manager if you would like more information.