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04 27 2016 | by Victor Xing | Central Banks

April FOMC: concerns ease over global risk factors

April FOMC

The uneventful April FOMC expectedly left the door open for a possible rate hike in June without committing the Federal Reserve for policy action, and policymakers also signaled easing concerns over foreign risk factors.  Kansas City Fed President George dissented, and Chair Yellen will likely face another dissent from Cleveland Fed President Mester if further steps to normalize policy is pushed into 2H 2016 at the June meeting, barring significant changes to economic and financial conditions.

In accordance to Fed’s data-dependent policy stance, all eyes will be on the upcoming data releases: ECI (Federal Reserve’s preferred wage measure) and PCE on Friday the 29th, as well as the highly watched NFP on May 6th amid numerous Fed speeches.

Financial markets largely shrugged off brief bouts of volatility following the statement’s release, and interest rates market proceeded to rally thanks to the month-end flows.  Dollar pared gains to trade largely in-line with session open, and Fed funds futures continued to price in one hike for the year of 2016 (this has risen from about three quarter hike as a result of recent energy rally).  WTI crude futures largely recovered from this morning’s bearish EIA report to reach session high of low $45 / barrel.

FOMC statement changes vs. March

In the latest policy statement, Federal Reserve officials highlighted further improvements in labor market conditions amid slower growth.  Household spending was described as “moderated” vs. “increasing at a moderate rate” in March, and households’ real income growth came at a “solid rate.”

Most importantly, the latest statement removed language introduced at the March FOMC to highlight global economic and financial risks.

April FOMC
The April FOMC statement removed language on global risk factors. Source: WSJ

Market reactions

The 5s30s curve initially bear flattened before 5s outpaced 30s in the subsequent rally.  This is largely a result of pent-up month-end flows waiting for FOMC “headline risk” to clear.

April FOMC
5 year Treasury futures (blue) vs. Ultra bond futures (gold) into and out of the April FOMC

Dollar’s reaction was fairly muted with the exception of a knee-jerk rally out of the FOMC:

April FOMC
DXY mostly unchanged following the FOMC

WTI crude futures rallied into the close to offset early session’s EIA-led decline

April FOMC
WTI crude futures rallied into the close

 

Next article04 23 2016 | by Victor Xing | Economics

Unintentional costs of ultra-easy monetary policy