FOMC: The day of the dovish hike? – SocGen

The Treasury market is convinced the Fed will hike today, but not convinced about the longer term and the FOMC’s response is likely to be a ‘dovish hike’ and that’s priced in, to a large degree, according to Kit Juckes, Research Analyst at Societe Generale.

Key Quotes

“Uncertain about how much slack there is in the economy or the labour market, FOCM members are inclined to want to ‘normalise’ rates while they have the chance, but they seem very pragmatic about the longer-term outlook. So more likely to raise rates now, without overlay hawkish commentary, and then lay the groundwork for another hike in the autumn if markets don’t take fright in the weeks ahead. That could leave yields in their range, the hunt for carry intact. Obviously, since this is to some degree what the market expects, the converse is also true – a ‘hawkish hike’ would come as a big surprise and unsettle higher-yielding currencies.”

“Before we get there, the minor business of retail sales and CPI data needs to be negotiated. Core CPI is expected to fall to 1.8% y/y from 1.9% and the headline to 2% from 2.2%. Retail sales are expected to rise by a steady 0.3% ex autos and gasoline. Nothing there to make the market fear an aggressive policy move.”