Mizuho Daily - What are you waiting for?

By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury, Department, Mizuho Bank, Ltd.,

What Are You Waiting For?

“What Are You Waiting For?” is a song by Nickelback; highly recommended by your scribe.A song that must at some level resonate with markets (perhaps even the Fed) ahead of tonight’s FOMC.

Markets were lackluster; slipping 0.2-0.3% on Wall Street (Nasdaq off 0.7% erasing recent gains) while UST yields were mostly sideways. USD was barely changed after a twitch.

Low-1.21, sub-0.77, 110 and mid-/high-1.32 are not unfamiliar to EUR, AUD, JPY and SGD.

So markets appear to be waiting for FOMC signals … whether express or between the lines.

But to be fair, allegations of data nonchalance (amid FOMC deference) trained at the miss in US retail sales are misguided.

Point being, larger than expected month-on month drop was grossly exaggerated by sharp upward revisions to prior month data.

Whereas US consumption trend is consistent with the fiscal fade that is well priced in.

Covid too denies the Fed a monopoly on the wait.

PM Muhyiddin’s address yesterday reveals that even as Covid restrictions are set to be relaxed starting July, Malaysia is waiting for average daily cases to fall below 500 before fully re-opening; projected to be end-Oct earliest.

A worthwhile distinction: it is one thing to wait for, but quite another to long for. So, while the world longs for an exit from Covid, markets merely wait for Fed’s “exit” plan.

FOMC: Between & Below the Lines of a Dovish Fed

For those sick of the “exit” elephant in the room, a restless child in the back-seat on this long monetary road-trip with the obligatory, but dreaded, “Are we there yet?” moment looms.To be sure, there is sufficient ambiguity around “there”. And Fed speakers have generally converged on timing a discussion on, not deadline for, for policy exit/”taper”.

Admittedly, after the last FOMC Minutes, some may be justifiably concerned about the minority of FOMC members flagging up the need to soon consider addressing “exit”.

Question is, is how soon, and to what extent the Fed alludes to “taper” in particular.

The short answer is that this is a negligible risk at this juncture. At least because the Fed will be very careful not to make sudden and unexpected moves.

In particular, with the Fed still transitioning to “talking about talking about” taper, this meeting is unlikely to deliver a hawkish jolt in the form of a warning shot on “exit” talks.

And certainly, there will be no reference to dialling back US$120bn/month pace of QE.

But to be sure the rhetoric that matters may be between, and below the lines; so to speak.

Starting with “below the line”, the “Dot Plot” will be the most important “non-verbal cue”.

Any shifts to bring forward the consensus rate hike initiation will be read as latently hawkish.

As for “between the lines“, even without discussing exit strategies, a more distinct emphasis on “state dependent” outcomes could also be seen as a warm-up act for “taper”; which has been flagged as being scheduled for “well before” any rate hikes.

On the nose would be any reference to discussions on exit strategies; and this could range from merely exploring the need for or as committed as delving into potential time lines.

As mentioned, “on the nose” is highly unlikely, but watch for between and below the lines!

Here’s what’s pertinent. With a fairly dovish Fed already baked in (slumping UST yields), the bar for lifting (nominal and real) yields may be a tad lower than is widely appreciated.

And that may have a corresponding potential for USD squeeze, even if only fleetingly so.

The bigger picture though is that regardless of dovish assurances at this FOMC, markets will not be able to shake off suspicions of Jackson Hole “taper” déjà vu. Not for long anyway.

Credit: Mizuho Bank Ltd