FOMC June 2016 Preview: No rate hike priced in

Members of the Federal Reserve, open market committee, will be convening for the two-day Fed meeting on June 14 and 15th. The FOMC meeting will be closely watched across the equity, bond and currency markets. On the table is the question whether the Fed will be able to lead the markets towards future interest rate hike expectations.

As of last week, after Janet Yellen’s speech in Philadelphia, the markets ruled out a rate hike. This was due to the May nonfarm payrolls report which showed that the US economy added 38k jobs on the month, one of the lowest levels in recent years. The previous months (March and April) numbers were revised lower by a combined 56k as well. While the US unemployment rate fell to 4.70%, it was for the wrong reasons, as more people left the job market, sending the participation rate lower as well.

Put aside the jobs report; the broader economic picture showed a relatively healthy pace of growth in the US. The first quarter GDP was revised higher, from initial estimates of 0.50% to 0.80%. Manufacturing data continues to remain sluggish but have managed to rise above the 50-level index.

Besides the weak trend in the jobs report, the markets also note that with the UK referendum vote on its EU membership just a few weeks away, many expect the Fed to hold back from raising interest rates at this meeting adding to more market volatility.

On Wednesday, June 15th, the FOMC rate statement will be released at 1800 GMT, followed by the staff economic projections. Here’s what to look for in the report:

• Fed funds rate 0.50% – Fed to hold off from raising interest rates
• Fed Staff economic projections – Markets will be looking to the dot plot which estimates the future rate hikes. Many believe this to be a litmus test given that Janet Yellen still expects to see the ongoing economic recovery make the Fed hike rates two more times this year
• At 1830 GMT, Fed Chair Janet Yellen will be holding a press conference

Expect the markets to see some wild swings within the 30 minute period leading to the press conference.

Market Consensus and Views

• HSBC: Soft data and international “uncertainties” will likely keep policy unchanged at the June FOMC meeting. Policy statement may present a neutral tone; rate projections may move down a notch for 2017 and 2018. We expect only one 25bps rate hike this year – September likely.
• BNP: We believe the FOMC will not hike rates at its 15 June policy meeting. We expect a moderate rise in the may CPI and retail sales and a pullback in industrial production. FOMC carefully balanced communication, “message likely will be that the committee’s medium-term outlook has not changed appreciably while uncertainties have increased. Maintain bias to hike, but call is on hold throughout 2016 and 2017
• RBC: Yellen’s June 6 speech pre-empted press conference, she will strike the same tone. 2016 dots may not change much but see a downshift in 2017.
• BAML: Fed will stay on hold to assess the US outlook and wait out risks. Call for September rate hike. Dots should keep 2 hikes in 2016 and 4 hikes in 2017. Yellen may say this year but not give a timeline.
• JPM: Jobs report sealed the case for no action and left FOMC hesitant to strongly signal the timing of the next rate hike, and so we anticipate only minor changes to statement. Dots could look for w hikes in 2016, but lower long-term estimates.
• DB: Rates unchanged. If Fed believes payroll weakness in temporary, then forecasts still incorporate 2 hikes in 2016. Projections are similar to March. Yellen might elaborate on uncertainties. DB’s call is one hike in December.
• Danske Bank: we expect the  committee to maintain  the  Fed funds  target range  unchanged at 0.25-0.50%  (announcement  Wednesday).  This is in  line with  both market  pricing and consensus among analysts. As we believe no one expects the Fed to do anything at this meeting, we expect focus to be on  the statement,  updated economic  projections (especially the  so-called ‘dots’) and Fed Chair Janet Yellen’s press conference. In her latest speech, Yellen did not repeat that a hike ‘in coming months’ could be appropriate, and she highlighted the downside risks to the US economic outlook, although she thinks the  positive  factors  outweigh  the  negative ones.
• Nordea: A rate hike is highly unlikely, but we expect the central bank to leave the door open for a hike in July or September. Given the renewed uncertainty about the strength of the US economy after the recent jobs report.