FOMC, the rest of the week and goodbye Summers

OK, so the following is just a jot down of my ideas for this week. It's not very well written, but I think all the points are there.

Summers does not want the position

Negative for the US dollar
Positive for risk sentiment
Does not guarantee that Yellen will be the next Chairman. Kohn is the other candidate.

Yellen - More dovish then Summers. (comparatively). Favourable on QE.

The even mention of Taper caused volatility in June. Yellen is seen as an extension of Bernanke.

Critical event risk this week – FOMC monetary policy announcement. Taper size of asset purchases. 

Quarterly policy meetings. June talked about the idea of reducing the size of its monthly asset purchases. After this meeting, next big meeting is December. 

Look at the taper as an important catalyst. Since June we’ve really seen Fed officials massage this idea. Built up so much speculation consistently, to the extent that they have done, would be a credibility issue. Would bring into question the way the central bank communicates monetary policy. Why wouldn’t they taper? I don’t think there is any answer to this. 

Asset purchases probably go down from 85bn a clip (40bn in MBS, 45bn in US govt bonds) to 70-75bn a clip (which will be in treasuries). Wants to do treasury side first, does not want to spook housing market. It’s already priced in.

USD positive or negative? Nothing in isolation. It’s already priced in.

Larger question is – what surrounds that announcement? What happens after September? Is this the beginning of a cycle? Or when is the next Taper. When is QE wrapped up? Bernanke has alluded to mid-next year round up. Or does everything remain contingent on economic data?

Consensus view- Fed will reduce their outlook for economic growth. May not happen, that we’ll have to see.  What does it support? This is the marking movement component.

If the baseline is 10-15 and the Fed does 5: Dovish – dollar negative
20+, Hawkish outcome – dollar positive

It’s the forward guidance that is going to be market moving.

Besides the FED, there are a number of important considerations. Today, Eurozone CPI has come out. 1.3%, came out fine.

Industrial Production a little weaker m/m. 0.4% vs 0.5% forecast.

ZEW economic survey – German is the focus number. Less relevant that hard data probably.

ECB – guidance -> rates will remain at the current rates or lower. If get data that’s relatively positive, it will suggest that rates will stay same rather than move lower.  Or lower component is where the speculation is.

Or negative data – expectation is that rates may go lower, or even that ECB moves forward with another liquidity injection setup similar to LTRO (late 11, early 12 introduced… in repayment now)

Also looking at UK CPI numbers, again in the context of guidance for the BoE. BoE has already talked about strict knockouts. If any of the following knockouts occur, the BoE needs to reconsider:
2.5%+ for 18 – 24 month, the number we’re looking at is the Y/Y August number where we’re looking at around 2.7%.

Current forecasts from survey of economists carried out by Bloomberg: Coming quarters 2.7% in Q3, 2.5% in Q4 and 2.2% Q1, 2.5% Q2, 2.3% Q3, 2.25% Q4, annual average of 2.3% and 2.1% in 2015. 5 year breakeven is around 2.8% if you look at the difference between inflation linked bonds and non-indexed govt bonds. But does this tell us anything? Probably not. It’s reduced a lot actually. Someone is right, someone is wrong. If we get a softer number of CPI, we are likely to get the British pound lower.

Basis for a EUR/GBP trade, short setup is that ECB is more dovish than BoE. But bottom of a channel at the moment at around .8384. Looking further down the week,

RBA, and BoE probably won’t say anything (Tues and Wed respectively). After FOMC, we have NZ number where we are looking towards a slowdown in growth to around 0.2%, RBNZ looking to raise rates most likely in 2014, however a softer GDP number might start to erode that idea. But it’s somewhat flimsy to look into next year. If the situation is materially softer, it won’t give you rate  cuts, but you’ll certainly begin to erode the outlook for the year ahead (where we’re looking for a 75bp to 100bp, we’re at 2.5% now). Soft GDP à NZD a little lower

SNB rate decision. Inflation forecast might be market moving. Object of the floor that the SNB has placed on the Eur Swiss exchange rate has been to fight inflation. Might be interesting to keep an eye on this.