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July FOMC: a less-dovish pivot as communicated
The July FOMC statement met market expectations of optimism by the Committee on U.S. economic conditions and easing concerns on Brexit’s near-term impacts.
The statement acknowledged the rebound in June NFP by indicating “strong” job gains and “increase” in labor utilization, while “household spending has been growing strongly” was a nod to the decent retail sales data on July 15th. Echoing recent policy comments, the FOMC statement also indicated that “near-term risks to the economic outlook have diminished,” and it would suggest that policymakers view Brexit as a medium-term risk factor. Indeed, Atlanta Fed President Lockhart outlined the following views on July 14th:
More immediately, there is the question of direct impact of Brexit on our economy. Negative effects could materialize through the trade channel if there is a sustained realignment of the dollar-pound exchange rate. We might also see similar effects in our trade with Europe and the euro area.
Immediately following the vote, there has been a lot of effort by a number of credible parties to estimate direct near-term impacts. Again, it’s early, but I’m persuaded the direct impact over a short time horizon will not be all that great.
So, to summarize my view of Brexit effects: negligible near-term effect; a risk factor over the medium term; higher uncertainty that could amount to a persistent economic headwind.
Investors had largely anticipated the less-dovish policy pivot, as nascent bear flattening was quickly followed by rates strength in front-end and belly of the Treasury curve.
Market attention now shifts to 2Q ECI (Fed’s preferred measure of wage inflation) and GDP on the 29th, as well as July NFP on August 5th. At the same time, long-end of the Treasury curve will continue to trend with global sovereign rates.
Next article07 08 2016 | by Victor Xing | Economics