Daily Commentary BY THE CURVE TEAM –

Data At Odds With FOMC

19th of June, 2017

Supporting their decision to lift rates this month, the FOMC once again reiterated that they see the current dip in the data as transitory. This view also underpinned the outlook for another rate hike factored into their dot plot chart, as well as a number of hikes in 2018. However the market continues to trade off the data, which on Friday night undershot expectations yet again and remains at odds with the FOMC’s view.

Friday’s data releases saw consumer confidence continue to drift off its highs, falling more than expected with the headline index, conditions and expectations all lower in June. Housing starts provided an even bigger miss, falling 5.5% against expectations of a 4.1% gain. To put the trend in the recent run of data in context, the Citi Surprise Index that tracks data outcomes against expectations had extended its decline, collapsing to -78.6, a six year low.

The run of weaker data has seen the spread between long and short term Treasuries continue to decline with the 2 year/10 year spread down to around 80bp. This sort of price action suggests that investor expectations around the outlook are souring. The outright level of the 10 year yield at 2.15% is also the lowest level since the election last November.

The enduring dip in the data is also creating some unease at the FOMC. Minneapolis Fed President Narayana Kocherlakota spoke about his recent dissent at the June meeting, instead voting for no change, saying in an interview with Reuters that I wish other people were joining me in my dissents…I think that there’s more sympathy for my views, but maybe people aren’t ready to take action.”

That certainly seems the case going by comments from Dallas Fed President Robert Kaplan who indicated how close the recent decision was for him, saying “In this job you make trade-off decisions; I think the fact that inflation of late has been more muted, for me, made me weigh those trade-offs much more carefully.”

It all adds up to an interesting period for the FOMC, much like our own Central Bank, who continues to assess incoming data and make evaluations against its own expectations around the outlook. We will get an update from the RBA tomorrow when they release the minutes from their June Board meeting.

David Flanagan

Director - Interest Rate Markets