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It's FOMC day and the market is already on the sidelines.

  • A 25bps rate hike is fully priced in by the market (even though we would highlight our prev outlier warning), but that's not the focus.

Instead, everyone is watching the updated dot plots and whether the median dot for 2017 is marked down.

  • On balance, we would not expect most to mark down their rate projections at this stage (which would probably mean an unchanged median) but there is an outlier risk that the Fed core (Yellen, Fischer, Dudley, Brainard) may well lower theirs.
  • Note in the Mar plot, there were 3 officials who projected less than 3 hikes for 2017.

Even if the median 2017 dot is left at 3, the question one needs to ask is whether the market will react with outright scepticism?

  • We think so.
  • Note that the market has been pricing out the odds of a 3rd Fed hike this yr and we suspect this will continue ahead amidst sluggish inflationary pressures, concerns of a more subdued US econ bounce and a Fed core narrative that is starting to tilt a little dovish.
  • The other thing to note is that if there are a few more Fed members who lower their rate projections, the market will take it as a strengthening signal that Fed tightening conviction is ebbing which will have a big bearing on trade psyche.

We refer back to our 07 Jun viewpoint and 05 Jun viewpoint where we talked about how we expect a more subdued US econ rebound given the lack of traction in wage growth/consumer spending/biz investments.

Note that we have long been sceptical of the Trump effect, and the enduring failure to push through on fiscal/tax policies is a fundamental negative.

  • On this point, we are also of the view that the divergence btwn soft/hard data will narrow further, which ultimately leaves us holding our long-held view of a 2 hike cycle for 2017.

Implicitly, we suspect the market will sell the USD and buy USTs post-FOMC.

  • For the USD Index, beyond any knee-jerk FOMC pop, we are eyeing ultimately eyeing a downside probe of 96.46 and 95.89. Currently around 97.00. Resistance at 97.14 and 97.46.
  • For USTs, our long-held view has been to buy the belly on dips, positioning for any shifts in Fed tonality. JH

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