- FOMC minutes will be watched for any balance sheet mentions
- Lacker resignation removes a super-hawk’s voice from the Fed
- ADP employment expected to remain firm despite weather-related volatility
- U.S. ISM non-manufacturing index expected to show a modest decline
FOMC minutes will be watched for any balance sheet mentions — The markets will assess today’s March 14-15 FOMC meeting minutes in particular for any progress by the Fed on its balance sheet deliberations. Several Fed officials have recently mentioned the possibility of curbing the Fed’s balance sheet reinvestment policy either later this year or in 2018, thus allowing the balance sheet to start declining. NY Fed President William Dudley late last week said that the Fed might start winding down its balance sheet later this year or in 2018, possibly pausing rate increases in the process.
In one scenario, the Fed could go ahead with the last two rate hikes for 2017 that the majority of Fed members seem to favor. The Fed in early 2018 could then pause on its rate hikes and start allowing its balance sheet to decline, giving the Fed some time to assess how much tightening effect the balance sheet wind-down will have on monetary policy and the economy. A much more hawkish scenario could see the Fed wrapping up two more rate hikes by Q3 and then starting to wind down its balance sheet in Q4.
We suspect that Fed Chair Yellen in any case will want to have a new balance sheet reinvestment policy in place before her term as Fed Chair ends on February 3, 2018. That would allow Ms. Yellen to have the Fed essentially on auto-pilot when she hands over the keys to whomever will be named as the new Fed Chair by President Trump.
The markets in any case are watching carefully to see if the Fed might shift its balance sheet policy sooner than expected, which could result in a quick upward spike in longer-term Treasury yields. Market participants are well aware of the potential for yield spikes on Fed balance-sheet changes because of the taper tantrum episode in 2013.
In the taper tantrum episode, then-Fed Chair Bernanke suggested in May and again in June 2013 that the Fed might taper QE3 later in the year given certain conditions. The markets responded by pushing 10-year T-note yields sharply higher by about +60 bp in just 6 weeks. In addition, after Mr. Bernanke’s taper statement on June 18, 2013, the dollar index rallied by +5% in just three weeks.
Lacker resignation removes a super-hawk’s voice from the Fed — Richmond Fed President Jeffrey Lacker on Tuesday resigned effective immediately after admitting that he improperly confirmed confidential Fed information to a private analyst back in 2012. Mr. Lacker’s resignation has no immediate impact on FOMC policy since he is not an FOMC voter this year. However, the resignation could have some dovish consequences in that Mr. Lacker’s voice as the Fed’s most hawkish member will be removed from the committee. Mr. Lacker will be replaced in an acting capacity by the Richmond Fed’s first vice-president Mark Mullinix until a replacement is named.
ADP employment expected to remain firm despite weather-related volatility — The market consensus for today’s March ADP employment report is for a solid increase of +195,000, adding to the strong +298,000 gain seen in February. However, the March jobs data may see some negative payback after warmer-than-normal weather boosted job growth in February. In addition, winter storm Stella hit the Northeastern U.S. in mid-March, possibly causing some business and employment disruptions that will hurt the March jobs data.
The markets are mainly looking ahead to Friday’s March payroll report where the consensus is for an increase of +175,000 following Feb’s strong report of +235,000. Payrolls over the last 12 months have shown an average monthly increase of +196,000, meaning the market is expecting mildly below-trend growth in March payrolls of +175,00 after Feb’s strong report of +235,000.
The Fed will obviously key heavily on Friday’s unemployment report as it assesses how quickly to raise interest rates this year. A payroll report below +150,000 on Friday that is not solely due to weather disruptions could cause the market to somewhat defer expectations for the Fed’s next rate hike. By contrast, another strong payroll report of over +200,000 would likely keep the Fed on track for its goal of two more rate hikes this year and for a continued active Fed discussion about when to start winding down its balance sheet.
U.S. ISM non-manufacturing index expected to show a modest decline — The market consensus is for today’s Mar ISM non-manufacturing index to show a -0.6 point decline to 57.0, giving back about half of Feb’s +1.1 point increase to 57.6. Expectations for a decline in today’s ISM non-manufacturing index are supported by Monday’s news that the ISM manufacturing index fell by -0.5 points to 55.2. In addition, the preliminary-March Markit US services PMI fell by -0.9 points to 52.9, although it expected to be revised +0.2 points higher in today’s final-March report.
Despite some weakness in March, U.S. business confidence in general remains strong based on continued hopes for reduced regulation, tax cuts, and infrastructure spending.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -700,000 bbl decline in U.S. crude oil inventories, a -2.0 million bbl decline in gasoline inventories, a -1.0 million bbl decline in distillate inventories, and a +0.5 point increase in the refinery utilization rate to 89.8%. U.S. crude oil inventories remain in a massive glut at +35.5% above the 5-year seasonal average. Product inventories are ample with gasoline inventories at +5.1% above average and distillate inventories at +17.3% above average. U.S. oil production last week rose by +0.2% to a new 14-month high of 9.147 million bpd.