Fed to Push the Reset Button - Derivative Logic

Last Week: A mostly quiet one with a late upward drift in yields as markets mostly stood pat ahead of the Fed meeting this week. The 10-year Treasury traded higher for the week by 12 basis points to 1.8872%, while 1-month LIBOR finished lower by 23bps to .4364%.

This Week: A busy calendar in the days ahead with US Q1 GDP and the Fed meeting being the highlights. Other Tier-1 data on Durable Goods, Consumer Confidence, manufacturing and America’s trade deficit will all be served up before Wednesday’s Fed meeting. No one expects that we’ll see a hike this week, and thus we’ll be looking toward the Fed’s official statement for clues into the odds for a move in June. Beyond Wednesday, Q1 GDP should see a weak 0.8% rise while other data on jobless claims and manufacturing wrap up the data calendar.

Take-Away on Q1 GDP: Expectations are low, and the headline number will have to be a clear negative to have any kneejerk shock value, given how much an already stagnant outcome is factored in. However, as we’ve said previously, negative US growth in Q1 must be viewed in its seasonal context: over the last decade Q1 GDP has been the stand out weak quarter and has typically given way to at least a partial resurgence in Q2. Take any negative print with a grain of salt.

Take-Away on the Fed: Markets haven’t looked much beyond the certain `on hold` Fed theme thus far this year. As we approach mid-year, this week’s Fed meeting will serve to set the tone for the second half where hikes are more likely as the global backdrop and US financial conditions have notably improved. As a result, markets will re-think their perception of the balance of risks going forward.

The economic doom and gloomers opinions aren’t yet being corroborated by US jobs and inflation data – US employers added an average of 209K of jobs per month in Q1, and inflation rose to 1.7%, much closer to the Fed’s 2% target than in 2015. While we won’t see a hike this week, the Fed’s official statement will serve to keep its options open, establishing more balanced odds for a June or July move than the market currently has priced in.

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