April, 07 2017 by lsr team

The Fed surprised markets and commentators, including us, as the FOMC minutes showed plans to shrink the balance sheet beginning in 2017. Steve Blitz says this is significant because:
 
•       Signalling shrinkage of its balance sheet shows Fed planning for three increases
•       Fed’s intention is also to present a smaller target to its critics

June, 17 2016 by lsr team

The latest US employment report was a bit of a shocker, with May’s dismal 38k job gain apparently killing any chance of a Fed rate increase in either June or July. Despite weaker than expected US jobs data and the downward revision of the Fed’s dot plot, we still expect two rate hikes from the Federal Reserve later this year. Click above to watch the video or below for our recent LSR View report.

October, 15 2015 by lsr team

The FOMC decision to keep interest rates on hold in September left a number of economists confused and angry. Some argued the committee was ignoring its mandate and pandering to external considerations. With GDP growing at a healthy pace for a seventh consecutive year and the labour market approaching full employment, a broad reading of US data made it hard to justify emergency levels of interest rates. Some investors, particularly those based in the US, were worried that the Fed was trying to become the world’s central bank, rather than staying within its own ju...

September, 18 2015 by lsr team

After weeks of speculation, the FOMC decided to keep interest rates on hold, once again postponing policy lift-off. Given recent events, the decision shouldn’t have been a surprise to most investors. Fed officials were clearly worried about unsettling already nervous markets and wanted more time to assess the impact of what some commentators are calling a global economic downturn. While the outcome of yesterday’s decision was perhaps never in question, the committee’s debate was surely still intense. Despite uncertainty about the short-term rate outlook...

September, 17 2015 by lsr team

It is fair to say that a rate increase today from the Federal Reserve would come as a shock to global investors. While FOMC members in recent weeks certainly haven’t ruled out a move, suggesting that today is a ‘live’ meeting, markets are assigning a low probability to a hike. Fed funds futures put the chances at less than 30% and, as Larry Summers points out, the Fed has never tightened policy without guiding markets to at least a 70% probability. For this reason, Summers argues that a rate rise today would be the biggest hawkish surprise since 1994, w...

August, 24 2015 by lsr team

The recent devaluation of the yuan appears to have been the main reason why expectations of a Fed rate rise been pushed back. As recently as mid-June a hike of 25bp by the end of 2015 was fully priced in, but that has now been pushed back to Q1 2016. Given the increasing FX uncertainty and global deflation, we think there is a significant risk that investors could perceive an earlier-than-expected rise in Fed rates as a policy mistake. There is already some evidence of this concern, with long-term breakeven inflation rates falling to post-crisis lows as two-year yields h...

July, 28 2015 by lsr team

The Fed continues to prepare the market for imminent rate hikes. Yet, while most economists anticipate a move in September, it seems many investors remain sceptical. Perhaps this is a classic case of the boy who cried wolf – the central bank has been threatening to raise interest rates for so long that many investors think it is bluffing. We think that the timing of lift-off really isn’t as important as the pace and extent of policy tightening thereafter. This will depend on two crucial things: 1) what happens to the neutral interest rate over the new few wee...

June, 12 2015 by lsr team

The strong May data showing 17.9 million annual rate of car sales and 0.7% bounce in retail sales. In other words, US consumers are using their gasoline windfalls to buy new cars and using them to drive to the mall. Since before the Q1 soft-patch we have highlighted the likelihood of a consumer-led acceleration in growth during the second half of 2015 - this now seems to be underway. By the time school starts again in September there should be enough confirmation of this acceleration to push the Fed over the line to its first rate hike. In the meantime,...