View from London: Does Fed Nominee Matter More than Data Ahead?
10/04/2017 6:00 am EST
The balancing act is between jobs, tax reform odds and the betting on the new Fed Chair. The Fed relevance to markets remains significant with rate hikes and balance sheet shrinking both key events, writes Bob Savage, CEO of Track Research in his Sunday commentary.
Question for the week: Does the Trump FOMC Chair decision matter more than the economic data ahead?
The balancing act is between U.S. jobs, the Trump tax reform plan odds and the betting on the new Fed Chair.
The FOMC relevance to markets remains significant with rate hikes and balance sheet shrinking into 2018 both key events.
Odds for a December hike held near 75% but the pace of the balance sheet adjustment is less clear, as is the composition of the roll-off – with MBS having less support to be held longer than treasuries. After 4 rate hikes, the FOMC hasn’t really hurt the easy money mood – financial conditions are better than they were at the beginning of the year, the USD is lower, the bond curve flatter.
So, many see the next set of rate hikes as essential to the business cycle risks into 2018 with inflation the bigger risk. The meetings on Friday by the president with former Fed Warsh and Governor Powell became significant to rates as many see Warsh more hawkish and more likely now than Yellen or Cohn as the next Chair choice.
The WSJ reports at Yellen, Taylor and Allison are also in contention. However, Yellen remains a favorite for many analysts. The odds for Warsh rose to 45% Friday while those for Gary dropped below 15%.
The jobs report will be an important baseline for comparing the hurricane hit to growth in 3Q and how easy it will be for the FOMC to see through that noise. Price pressures from the hurricanes are another point but that will be more difficult from the data in the week ahead. The charts that seem to be the key focus for last week were PCE and weekly claims – both left many less certain about the sharp move up in U.S. fixed income.