Ambiguity In Fed’s Message Keep USD, US Yields Ranged

 | Apr 30, 2014 06:57AM ET

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Markets remain cautious heading into the U.S. Federal Reserve's policy meeting later. Stronger corporate earnings in the US gave yesterday’s US session a boost but there has been no real follow- through in Asia or Europe. The BoJ reiterated its standing policy stance overnight, with little impact on JPY as the market was anticipating this result. The BoJ statement said the bank would hold "money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen". Many, including the BoJ, view recent data as near achievement of their goals. However, we suspect that incoming data, including inflation, will head in the opposite direction and additional action will be needed in July (get ready JPY bears). We are heading into a data-full US session today. The US will release the 1Q (advance) GDP growth expected to have decelerated to 1.2% from the previous 2.6% (q-o-q annualized) due to difficult winter conditions and slowdown in economic activity in US at the beginning of 2014. However, today’s ADP report should show improvement on private payrolls in April, the consensus aims for 210K new private jobs versus 191K a month ago. The April NFPs (due on Friday) are seen at 215K (vs. 192K in March). The economic data is important to anticipate Committee’s economic outlook as USD fails to gain momentum on tighter policy expectations. The Fed will publish its new projections on growth, unemployment, inflation, Fed rate and overnight interbank loans on June 18th. The macro-metrics should continue recovering from hard winter conditions by that time.

Today at 18:00 GMT, the FOMC will announce its rate decision and is expected to reduce its monthly bond purchases by another 10 billion dollars to USD 45bn / month. Clearly the accompanying statement will surely be significantly measured as to not to dispute markets and with no follow-up press conference there will be lack of granularity need to shift USD from its current range. So far Fed Chair Yellen’s public communications have been greatly confusing for the markets since she has taken over the FOMC’s governorship. The market expectations for the first Fed rate hike swing between “six months” and “considerable time” after the end of bond purchases program. The lack of clarity on Fed’s policy outlook keep the US 10-year government yields stuck within 2.60% - 2.80% range. The Atlanta Fed President Lockhart asked the Fed members to sharpen their voice and pay more attention to rate forecasts. We do not expect any significant movement in USD and US rates at today’s meeting. The focus on policy normalization should intensify by the end of bond buying program.