September FOMC - hawkish dots but relatively stable markets
USD: The September FOMC overnight sees the Fed’s median dots shift higher by more than consensus while Chair Powell also signals tapering of $120bln/month asset purchases will likely be announced in November and taper will proceed at a pace around $15bln/month so long as data evolves as expected. But Chair Powell is relatively neutral in the press conference even though notably focusing on upside inflation risks – also evident in revised forecasts. The upward drift in dots shows a Fed increasingly confident in hiking rates starting around the end of 2022/ beginning of 2023 (in line with market pricing) and proceeding at a pace of 3 to 4 hikes per year. 2022 dots are now split 9-9 regarding whether or not Fed should raise rates before the end of 2022, compared to an 11-7 split in favor of no hikes in June. The 2023 median also moves up from 0.625% to 1.00% showing an approximate pace of four rate hikes per year. In June, 5 officials had wanted no hikes through 2023 but that number has now shrunk to just 1 no-hiker. The 2024 dots range from a low of three cumulative hikes (50-75bp) and a high of 2.5-2.75% with a median of 1.75%. In the press conference, Chair Powell gives guidance that net asset purchases could be fully wound down by “around the middle” of 2022. This would be consistent with Citi analysts’ base case of starting in either November or December and tapering at a pace of roughly $15bln/month.
- USD: Chair Powell further clarifies that the test for “substantial further progress” in the labor market is now “all but met” and that tapering could be announced “as soon as” the next meeting. He further explains a “decent” or “reasonably good” jobs report would be enough to meet the condition. Concerns about upside risk to inflation also rise somewhat with 2021 core inflation marked-to-market up to 3.7% from 3.0%. More interestingly, projections show medians for 2.3% core PCE in 2022, 2.2% in 2023 and 2.1% in 2024 and show some mild persistence in stronger inflation. Chair Powell though attributes most of the overshoot to supply chain bottlenecks that would ultimately right themselves though admitting these bottlenecks may take longer than expected to clear. But he also explicitly states that if inflationary pressures are stronger and more sustained, the Fed is prepared to respond. The discussion of the tightness of the US labor market however, shows that the dominant view within the FOMC committee is that this is a “transitory” issue. Chair Powell states that “in many ways the labor market is very tight, but also has lots of slack and thinks those imbalances will “sort itself out”, while attributing the lack of labor supply to resurgent concerns about the Delta variant.
- USD: Overall, the FOMC is somewhat more hawkish than consensus, but markets seem to take this in stride with a modest 25pip uptick in DXY (broad based USD Index) from the prior session’s close, UST 10Yr yields moving in a 4bp range post FOMC but ultimately ending the session slightly lower at 1.3% than where they began (at 1.33%) and 2Yr UST yields finishing up 2bp (at 0.24%) from Friday’s close while US equities are relatively resilient.
Data/ Events for the remainder of this week – BoE, SNB and German elections
- GBP: Bank of England Bank Rate – Citi: 0.10%, prior: 0.10%; Asset Purchase Target – Citi: £875bn, prior: £875bn; Corporate Bond Purchase Target – Citi: £20bn, prior: £20bn – no changes to policy seen at this meeting. The focus tonight will be on risks to the Bank’s optimistic forecasts. If Citi analysts’ more pessimistic view on growth and the labor market plays out, even the hawkish MPC may not hike rates in 2022.
- CHF: Swiss National Bank Policy Rate – Citi: -075%, prior: -0.75% - the economic backdrop is improving, but unlike other central banks, the SNB still has CPI well within its comfort zone of 0-2% (0.9% YY in August and lower in underlying terms). The Swiss Franc remains “highly valued” as evidenced by the SNB’s recurring FX intervention episodes, most recently in early August. Citi analysts expect no changes to the negative interest rate policy (NIRP) and the readiness to intervene in FX markets at today’s meeting.
EUR: German election due September 26 - A “Traffic Light” coalition of SPD, Greens and FDP from a CDU/CSU-led “Jamaica” base case would likely make a large public investment program and further European integration more likely. But the debt brake could still limit how much debt-financed investment such a government could provide, as changing the constitution would probably be out of reach.
EUR: Euro area Manufacturing PMI, Sep Flash – Citi 60.0, prior 61.6; Services PMI, Sep Flash – Citi: 58.5, prior: 59.7; Composite PMI, Sep Flash – Citi: 58.2, prior: 59.5 – Citi analysts estimate that the flash composite PMI likely fell slightly in September for the 2md successive month, down about a total of 2 points from the 15-year high of 60.2 seen in July. This slight correction would be consistent with a gradual deceleration in the pace of economic expansion towards the end of the summer as GDP closes in on its pre-pandemic level. For services, the rate of expansion probably eased to around 58.5 from the 3Yr high in June, while the manufacturing PMI index could have weakened slightly as delivery times shorten marginally to reflect mild easing in supply constraints.
EUR: German Ifo Business Climate, Sep – Citi: 99.5. prior; 99.4; Ifo Expectations, Sep – Citi: 97.0, prior: 97.5; Ifo Current Assessment, Sep – Citi: 102.0, prior: 101.4 - concerns about the delta variant domestically should dissipate as case numbers have stabilized and hospitals remain largely empty. The export-oriented manufacturing sector may be facing more short-term headwinds from supply shortages, but at least the China relationship suggests only limited further downside, with the Li Keqiang index remaining in solid growth territory /7.5% YY in July). Overall, Citi analysts expect a largely stable reading.
GBP: UK Manufacturing PMI, Sep Flash – Citi: 61.0, prior: 60.3 - output in the manufacturing sector fell back sharply again in August according to the final PMI data. Production here remains constrained by supply and this month Citi analysts expect output to have improved marginally – driving the headline index up. Work backlogs are likely to have continued to accumulate at a rapid pace and the team expect this to support UK manufacturing production through the first half of 2022.
GBP: UK Services PMI, Sep Flash – Citi: 56.0, prior: 55.0 - growth in the UK services sector fell back to its slowest rate since February in August. Alongside some supply constraints, there is evidence demand is moderating too. Citi analysts expect a slight pickup this month, driven by further normalization associated with a return to work. However, the data is likely to moderate further in the months ahead as a combination of high Covid cases and more activity moving indoors weighs on overall activity.
This is an extract from the Daily Currency Update, dated September 23, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -