Next Week's FOMC Meeting and More

The FOMC Meeting on Tuesday and Wednesday will hold the markets' attention next week, as well as a slew of corporate earnings and some US economic data.  The markets will be looking to see if the FOMC Statement shifts dovishly with a greater emphasis on the absence of inflationary evidence, as did Yellen's Semi-Annual Monetary Policy Testimony (and ECB President Draghi's press conference).   The markets could be mildly disappointed, however, as the key parts of the June FOMC Statement do not have to be changed to accommodate Yellen's dovish tilt -- and at the same time to accommodate the hawkish views of other FOMC members.  Moreover, keeping the same language as in June would allow the Fed to retain flexibility while it awaits July-August data.  Nonetheless, US economic data that print near consensus estimates on Friday -- Q2 Real GDP and Employment Cost Index -- should sustain the rallies in stocks and Treasuries.

The key parts to watch in the FOMC Statement, from the June Statement, are:

First paragraph:

"On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent.  Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance."

Second paragraph:

"Inflation on a 12- month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term."

 
Fourth paragraph:

"The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal."

"The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.  However, the actual path of the federal funds rate  will depend on the economic outlook as informed by incoming data."

The final assessment of the July FOMC Statement will likely leave the odds of a September Fed rate hike little changed.  Market commentary will probably highlight the importance of the upcoming July and August CPI in the September rate decision.  My early thoughts are for the July Core CPI to show a steady 1.7% y/y, leaving the issue unresolved (see my prior blog).

As for this coming week's key US economic data, consensus looks for 2.6% (q/q, saar) Q2 Real GDP and 0.6% q/q Employment Cost Index.   If correct, they would indicate moderate economic growth and steady labor cost inflation.  /1/ Q217 Real GDP Growth would exceed the Fed's 1.8-2.0% central tendency, but, combined with the below-trend 1.4% Q117 pace, would put growth over H117 at 2.0%.   Note that the NY Fed and Atlanta Fed models' estimates for Q217 Real GDP are 2.0% and 2.5%, respectively.   While softer than consensus, they still show moderate growth.   All these forecasts can change in response to data released before Friday.  /2/ The y/y for the ECI would be 2.4% -- in line with increases seen in other labor cost measures.   Such prints should not change the odds of a September Fed rate hike significantly.

Economic growth looks to be remaining moderate in early Q317.   The NY Fed model's early projection is 2.0%.  And, the decline in last week's Initial Claims to 233k raises the possibility that growth may be picking up from late Spring.  It will be important to see if Claims stay low in Thursday's report.  If they do, the risk would be for forecasts of Q317 Real GDP to trend upwards.