Insight into the Fed meeting in September

The US dollar looks to reverse losses as the Fed meeting gets underway later this week..

The sixth FOMC meeting in 2017 is scheduled for the 19th- 20th September. After voting unanimously to leave the Fed funds rate unchanged at 1.00- 1.25 percent in July, the forthcoming MPC meeting assumes significance and expectations are fairly high in terms of how the Fed will forge ahead with its interest rate policy and also clarify on its position with reference to the trillions of dollars in assets which the Bank holds.

In a press note that accompanied the July meeting, the Fed maintained a neutral stance on the timing of future rate hikes and stated that procedures to normalise the balance sheet will be implemented soon as long as the broader economy continues with the current path of expansion.

Since its last policy meeting, economic data from the US has been mixed. Positives include

  • Q2’ 17 GDP numbers expanding to 3 percent annually from 1.2 percent in Q1.
  • Increase in the annual rate of home ownership by 0.8 percent in Q2’ 17.
  • Revenue growth from selected services rising 3.2 percent in Q2 from 1.3 percent in Q1.
  • A 0.4 percent increase in personal income in July, with modest MoM rise in PCE to 0.3 percent.
  • Rise in inflation to 1.9 percent in August from 1.7 percent in July.
  • Strong growth in the PAT figures for companies with assets > $50 million.

The prominent negatives are

  • Fall in new orders for manufactured durable goods to 6.8 percent in July from close to 3- year highs in June.
  • Small rise in the unemployment rate from 4.3 percent in July to 4.4 percent in August.
  • 0.4 percent MoM surge in wholesale inventories in July.
  • Modest MoM rise in trade deficit to $43.7 billion in July.
  • Sharp decline of 4.8 percent in the seasonally adjusted YoY housing starts numbers with sales of single family homes skidding 9.4 percent in July from the previous month. 

As we approach the end of the third quarter, the broader US economy is in good shape and corporate earnings continue to surge.

More than 75 percent of the companies listed on the S&P 500 have reported higher than expected EPS growth in Q2’17 with less than 10 percent announcing results below analysts’ expectations.

The stock markets have also been on a roll in the first eight months of 2017 with the NASDAQ rising more than 19 percent, followed by S&P at 11 percent and the Dow up about 10 percent.

The S&P which accounts for about 80 percent of the total market cap of the US equity markets has posted double digit growth for two successive quarters this year, the first time in 6- years.

The Fed Beige Book, released on September 6th indicated

  • Economic activity expanded at a modest to moderate pace across all districts in July- August.
  • Moderate slowdown in employment in some districts, particularly in the manufacturing sector.
  • Tighter labour markets leading to wage growth in a few districts.
  • Input prices increasing at a faster pace compared to their output counterparts.
  • Mixed growth in automobile sales.
  • Low inventories in residential properties resulting in prices moving up.
  • Near term positive growth outlook in both the manufacturing and service industries.

With inflation gathering momentum and the economy near full employment, the only concern is the auto industry where vehicle sales dropped to 3- year lows in August after the industry reported a 2 percent drop in vehicle sales compared to the previous month.

The monetary policy meeting is just a few days away but the markets are divided both in terms of the outcome of the interest rate decision and the Fed’s asset sale.

While a majority of analysts will be focused on what the Fed has to say about reducing the assets on its balance sheet especially the corporate debt which it accumulated during the peak of the financial crisis, an interest rate hike could also lead to near term volatility in the financial markets.

The USD is likely to rebound while stock prices could ease a bit as traders’ book profits after a prolonged equities markets rally.

The greenback has been the worst performing currency this year with the US dollar index (DXY) ending in negative territory on 7 out of 8 months. The index is down more than 10 percent YTD, however, the trend could change next week depending on the outcome of the Fed meeting.

Currency Outlook:

The US dollar has remained weak versus most of the majors in 2017. Against the Sterling and the EURO the US currency has given back almost half the gains following the Brexit vote. However the losses are likely to be capped around current levels as the Fed meeting gets underway this week.

The EURO is in a long term uptrend versus the dollar with the pair recently hitting the highest level since January 2015. In the near- term, the pair is likely to oscillate in the 1.1800- 1.2200 band and trading opportunities can be found as prices approach either end of the trading range.

The GBPUSD pair has strong resistances around 1.3600 with the gains likely to be capped around these levels in the near- term. Short trades are likely to creep in near the resistances, holding the pair in a tight 1.3550- 1.3600 range for the next couple of sessions. Look to short the Sterling if prices breach 1.3600 with stops at 1.3650 for near term targets of 1.3400- 1.3450.

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