As discussed earlier, and as both Bank of America and JPM explained, the biggest risk for the market next week is if the Fed not only doesn’t cut – the market assigns a very low probability to such a “pre-emptive” move – but fails to signal an aggressive dovish reversal in the form of a rate cut in July. And yet, despite its upbeat outlook – it still expects the S&P to close the year at 3,000, Goldman’s strategists are certainly taking the over on how hawkish the Fed will sound next week.
As Goldman’s chief economist Jan Hatzius writes, the bank expects “unchanged” policy at the June 18-19 FOMC meeting and sees the subjective odds of a June cut at only 10%. More importantly, while Goldman looks for a dovish tilt to the proceedings it won’t be nearly enough to appease markets that have aggressively priced rate cuts in the fall.
Barring an unlikely surprise on the funds rate, we expect the market to focus on four key developments:
- the statement’s policy stance/balance of risks paragraph,
- the number of participants projecting cuts in the Summary of Economic Projections (SEP),
- the extent of dovish changes to the statement and economic forecasts, and
- the tone of Powell’s press conference.
Rather than Goldman’s standard “Then and Now” table, the chart below “plots the setup for next week’s meeting across three dimensions, as well as their averages ahead of three major dovish shifts: September 2007 (at which the Fed abandoned the hiking bias and cut 50bps in response to subprime turmoil), September 2010 (formally signaled QE2), and March 2016 (scuttled the hiking cycle until global risks abated). Here, Hatzius also shows the three-month evolution of these four variables: stock prices, IG credit spreads, and consensus GDP growth.
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