22 June 2010
Flash Comment
FOMC: Preview
The Fed is expected to keep policy measures unchanged and we expect very few
changes to the statement. The European debt crisis and resulting deterioration in
financial market conditions is likely to delay the normalisation of monetary policy.
If anything, the section on growth could be downgraded a little on the recent
deterioration in financial conditions and the weak housing data. The forward looking
part of the statement will be held unchanged.
The market is currently pricing the first Fed funds rate hike in May 2011 and we do
not expect the statement to rock current market pricing much.
Activity
The recovery is looking increasingly robust. Domestic and foreign demand for consumer
and capital goods are back to pre-recession growth rates. The recovery is broadening from
the manufacturing to the non-manufacturing industries and the labour market has turned
the corner. Housing remains a weak spot but the data is currently difficult to interpret due
to tax credit distortions. The statement is likely to reflect a slightly less upbeat growth
picture given the recent deterioration in financial conditions and the weak housing data.
Even though near-term growth is likely to be viewed as solid, the outlook will remain for
moderate expansion.
Inflation
Core inflation has fallen below the Feds comfort zone and remains on a downward trend,
reinforced by the huge slack in the economy. 5y/5y B/E inflation has declined recently
but the deflationary element is countered somewhat by PPI data, which suggest that
deflationary pressure is easing in the production pipeline. The risk for a change in the
inflation language is very low. The FOMC is likely to reiterate its expectation that
inflation will remain subdued for some time.
%
Fed funds
Futures market
Danske
08
09
10
11
Unchanged
Hike to 0.50%
DB
100%
0%
Market*
100%
0%
DB
0-0.25%
0-0.25%
0-0.25%
0.75%
Market
0.19%
0.23%
0.28%
0.53%
Consensus
0-0.25%
0-0.25%
0-0.25%
1.00%
Market pricing
The market is currently pricing an initial 25 basis points hike in May 2011 and a close to
30% chance of a hike in January 2011. We do not expect the language in the statement to
rock these relatively dovish expectations much and hence recommend a neutral position
going into the meeting. DO NOT REMOVE THIS BREAK NOR LET IT MOVE ON TO
THE
FOLLOWING
PAGE
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Senior Analyst
Signe Roed-Frederiksen
+45 45 12 82 29
sroe@danskebank.dk
Senior Analyst
Peter Possing Andersen
+45 45 13 70 19
pa@danskebank.dk
www.danskeresearch.com
Flash Comment
2.25
Size of Fed balance sheet >>
2.00
2.50
2.25
1.75
1.50
1.25
1.00
0.75
0.50
0.25
90
92
94
96
98
00
02
04
06
08
Thousand bl
2.00
1.75
1.50
1.25
1.00
0.75
0.50
-1
03
10
04
05
06
07
08
09
10
Source: EcoWin
5.0
6.0
3.00
5.0
2.50
Core PCE
4.0
4.0
3.0
3.0
"Comfort zone"
1.50
1.50
1.00
1.00
1.0
1.0
0.50
0.0
94
96
98
00
02
04
06
08
2.00
"Comfort zone"
2.0
92
0.00
0.00
07
4.5
09
10
SPF 10-year
inflation forecast
4.0
08
5.0
0.50
3mth AR
10
3.00
2.50
2.00
2.0
0.0
90
Core PCE
4.0
4.0
Michigan 5-year
SPF 10-year
inflation expectations
inflation forecast
3.5
4.0
3.5
3.5
3.5
3.0
3.0
3.0
3.0
2.5
2.5
2.5
2.5
2.0
1.0
1.0
0.5
1.5
0.0
90 92
94
96
98
0.5
0.0
00
02
04
06
08
2|
22 June 2010
10
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
05
06
07
08
09
www.danskeresearch.com
10
Flash Comment
Index
Index
ISM non-manufacturing
65
Index
Index
ISM non-manufacturing
65
60
60
60
60
55
55
55
55
50
50
50
50
45
45
40
40
35
35
30
30
45
Neutral zone
40
35
ISM manufacturing
30
90
92
94
96
98
00
02
04
06
08
40
ISM manufacturing
04
750
400
500
250
250
-250
-250
Non-farm payrolls
-750
-1000
90
92
94
96
98
00
02
04
06
08
7.5
-1000
-800
% y/y
10.0
15
7.5
10
-2.5
-2.5
-5.0
22 June 2010
-15
-25
3|
10
Real personal spending
-10
-12.5
10
15
-10
-20
08
3 mth chg, % AR
3 mth chg, % AR
-5
-10.0
10
-5
-10.0
09
-15
06
08
-7.5
04
-800
-7.5
02
-600
0.0
00
-400
Non-farm payrolls
0.0
98
400
200
07
2.5
96
-200
10
2.5
94
-200
-600
5.0
-12.5
92
10
-750
5.0
-5.0
09
08
3 mth. avg.
-400
% y/y
07
200
-500
10.0
06
500
-500
05
750
35
30
10
45
Neutral zone
-20
-25
07
08
09
www.danskeresearch.com
10
Flash Comment
Millions
2.0
12.5
900
10.0
850
1.5
7.5
1.0
5.0
0.5
0.0
1.0
2.5
650
0.9
0.0
600
0.8
-5.0
80
85
90
95
00
05
550
0.5
400
0.4
-10.0
350
0.3
10
03
12
98
22 June 2010
07
08
09
10
00
02
04
0
06
08
10
4
Fed funds
2
2
10-year Treasuries
96
06
Fed funds
94
10
8
92
05
0
90
4|
04
10
0.6
-7.5
0.7
500
450
12
1.2
1.1
-1.0
-2.0
75
1.3
700
-2.5
800
1.4
750
-0.5
-1.5
thousands
mln
3 mth LIBOR
0
0
03
04
05
06
07
08
09
www.danskeresearch.com
10
Flash Comment
22 June 2010
www.danskeresearch.com
Flash Comment
consolidation efforts, the result would likely be slower growth in Europe and potentially a
weaker global economic recovery. Some participants expressed concern that a crisis in
Greece or in some other peripheral European countries could have an adverse effect on
US financial markets, which could also slow the recovery in this country.
Nearly all members judged that it was appropriate to reiterate the expectation that
economic conditions including low levels of resource utilisation, subdued inflation
trends, and stable inflation expectations were likely to warrant exceptionally low levels
of the federal funds rate for an extended period.
See Flash comment: FOMC minutes: exit in slow motion
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22 June 2010
www.danskeresearch.com
Flash Comment
FOMC
HAWKISH
NEUTRAL
Lacker
Richmond
Non-voter
Plosser
Philadelphia
Non-voter
Hoenig
Kansas City
Voter
Fisher
Dallas
Non-voter
Kocherlakota Minneapolis
Non-voter
Duke
Board member
Voter
Pianalto
Cleveland
Voter
Evans
Chicago Fed
Non-voter
Warsh
Board member
Voter
Tarullo
Board member
Voter
Lockhart
Atlanta
Non-voter
Bernanke
Chairman
Voter
Bullard
St. Louis
Voter
Kohn
Board member
Voter
Dudley
New York
Voter
Yellen
San Francisco
Non-voter
Rosengren
Boston
Voter
DOVISH
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22 June 2010
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Flash Comment
Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The authors of
this report are Signe Roed-Frederiksen, Senior Analyst and Peter Possing Andersen, Senior Analyst.
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high
quality research based on research objectivity and independence. These procedures are documented in the Danske
Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not
report to other Danske Bank business areas. Research analysts are remunerated in part based on the overall
profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other
remuneration linked to specific corporate finance or debt capital transactions.
Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals
Ethical rules and the Recommendations of the Danish Securities Dealers Association.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology
as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be
obtained from the authors upon request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data is calculated
using the closing price from the day before publication.
Disclaimer
This publication has been prepared by Danske Markets for information purposes only. It has been prepared
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22 June 2010
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