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March FOMC Preview: Wait and See - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 15, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Research Team at Nomura, suggests that since the end of January, the situation has normalized, at least to some degree and the economic data have held up and fears of an imminent recession have receded.

    Key Quotes

    “In addition, inflation has picked up a bit and over the last three weeks financial conditions have eased. Relative to the end of January, risks to the US economy now appear to be lower, but the degree of uncertainty around the outlook remains substantial:

    • While the economic data have generally held up, they do not point to robust growth. Our GDP tracking estimate for Q1 is 1.8%.

    • Employment growth has remained strong, but other labor market indicators have been weak. The Federal Reserve Board's Labor market Conditions Index (LMCI) fell in both January and February.

    • The industrial side of the economy continues to underperform in response to declining investment in the oil & gas sector, and drag from past USD appreciation.

    • Financial conditions have recovered notably over the last four weeks. However, some aspects, particularly those relating to credit, remain tighter than they were in December. Moreover, the increase in volatility in financial markets over the last nine months may be a drag on future growth.

    • The external outlook remains challenged. There is little evidence of more robust growth in the rest of the world and policy continues to be a source of volatility.

    • Core inflation has accelerated somewhat, and that is a welcome development from the FOMC’s perspective. However, survey measures of inflation expectations continue to trend lower, while market-based measures of inflation compensation remain at very low levels.

    Given the still elevated uncertainty about the outlook we do not expect the FOMC to change policy at next week’s meeting. Recent commentary from Fed officials does not suggest that a change is imminent.

    The more interesting question will be how the FOMC’s forecast for the economy and interest rates change. Given the resilience of the economy and the recovery in financial conditions, we do not expect significant changes in the economic forecasts. However, we do expect a lowering of interest rate forecasts – we expect the median for 2016 and 2017 to fall by 25bp.

    We do not expect Chair Yellen to send a strong signal about upcoming policy decisions, but rather to stick to the themes of the FOMC statement – i.e., that the economy is on track, the Committee is monitoring financial and foreign developments, that it expects to raise rate gradually, but future decisions will depend on how the economy and inflation evolve.”
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