Investment Research — General Market Conditions 29 April 2015 FOMC Meeting Still on track for a September hike Downbeat on the past but still confident on the outlook The statement from the 28-29 April FOMC meeting had a clear division between the description of developments since the last meeting on 18 March and the forward-looking paragraph. The latter was basically unchanged (see comparison below) except for an added sentence stating that despite Q1 weakness in the economy, the FOMC still believes the economy will expand at a moderate pace and labour market indicators will move to levels consistent with the dual mandate. However, the former described the downbeat nature of recent data releases. It summarised that economic growth slowed over the winter months but that this in part reflected transitory factors. Further, the pace of job gains moderated, underutilisation of labour resources was little changed, growth in household spending declined; Business fixed investment softened, the recovery in the housing sector remained slow and exports declined. On the positive side, and in our view a key reason to expect a rebound in growth in the current and coming quarter, the statement mentioned that households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. In terms of inflation, the statement said that inflation continued to run below the FOMC’s objective but did not directly mention the recent stabilisation in core inflation. The forward-looking paragraph on inflation repeated that the Committee expects inflation to rise gradually towards 2% over the medium term as the labour market improves further and the transitory effects of declines in energy and import prices dissipate, with import prices replaced the previous formulation other factors. In our view, the statement is consistent with an FOMC that remains on track to hike rates this year, conditional on a rebound in GDP growth in the current quarter and employment, which accelerates to an above 200,000 per month average again in coming months. Thus, we stick to our expectation that the Fed will deliver a first 25bp rate hike in September this year. Yields and the USD to move higher as first hike draws closer After a general upward trend in US treasury yields this week, yields barely moved on the FOMC statement. The first hike from the Fed is now fully priced in December this year but the path of hikes over the following two years remains extremely subdued. We continue to expect US economic data to show improvement over the coming months and the labour market to continue to tighten. Hence, we stick to our call of a first Fed funds rate hike in September this year, which will, in our view, pave the way for significantly higher rates in the 2-5Y segment of the curve in coming months as the first rate hike draws closer. Looking at past hiking cycles, rates have started to move higher three to four months ahead of the first hike and we think the current cycle will be no different. Senior Analyst Signe Roed-Frederiksen +45 45128220 [email protected] Senior Analyst Morten Helt +45 45128518 [email protected] Important disclosures and certifications are contained from page 4 of this report. www.danskeresearch.com FOMC Meeting The US dollar has corrected lower recently in a broad-based decline against most major currencies. In particular, the combination of a very stretched speculatively long USD positioning, as indicated by the IMM positioning data, and weak US data has been a negative mixture for greenback. The deterioration in risk sentiment following the weak Q1 GDP data from the US today was also a driver behind the acceleration in USD selling this afternoon. However, the USD has recovered a little following the FOMC announcement, as the statement did not provide much new information and we continue to expect EUR/USD to fall over the coming three to six months on relative monetary policy expectations. A near-term stabilisation in EUR/USD will probably be subject to a general improvement in risk sentiment, while the next leg lower in the cross is likely to depend on positive US data surprises. Historically, the USD tends to strengthen in periods when the Fed stops easing and until it starts to tighten. We see no reason why it should be different this time, particularly as we expect the ECB to continue its quantitative easing programme until at least September 2016. Comparison of statements Release Date: March 18April 29 2015 For immediate release Information received since the Federal Open Market Committee met in JanuaryMarch suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and a lowerthe unemployment rate remained steady. A range of labor market indicators suggests that underutilisation of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted was little changed. Growth in household purchasing powerspending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment is advancing, whilesoftened, the recovery in the housing sector remainsremained slow, and export growth has weakenedexports declined. Inflation has declined furthercontinued to run below the Committee's longer-run objective, largelypartly reflecting earlier declines in energy prices and decreasing prices of nonenergy imports. Market-based measures of inflation compensation remain low; surveybased measures of longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expectsAlthough growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually towards 2% over the medium term as the labor market improves further and the transitory effects of energy price declines in energy and other factorsimport prices dissipate. The Committee continues to monitor inflation developments closely. 2| 29 April 2015 www.danskeresearch.com FOMC Meeting To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0.00-0.25% target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realised and expected--toward its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgagebacked securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Voting for the FOMC monetary policy action were Janet L. Yellen (Chair), William C. Dudley (Vice Chairman), Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo and John C. Williams. Releases 3| 29 April 2015 www.danskeresearch.com FOMC Meeting Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Signe Roed-Frederiksen, Senior Analyst, and Morten Helt, Senior Analyst. 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