Capital Properties FX
Capital Properties FX

FOMC Meeting Time – What to Expect?

This week is absolutely packed with U.S. data. We have the non-farm payrolls, ISM PMI’s, average hourly earnings and plenty of secondary data releases. Even though the current week is no different compared to any other 1st week of the month, there are two exceptions. First of all, month-end flows affect the price action, creating a little bit more volatility. And secondly, it’s the FOMC meeting time.

However, as the FED hiked the rates just one meeting ago, it’s unlikely that we’ll hear something surprising. Most likely, the members of the FOMC we’ll vote to keep the Federal Funds Rate at the current level and that’s all. It’s also unlikely that they’ll upgrade or change their forward guidance. We should still expect them to repeat the same thing – three rate hikes in 2017.

While it is highly probable that it’s going to be a non-event, we can never be sure. Furthermore, as today is the last day of the month, it’s hard to say if the moves in major currency pairs are affected by month-end-flows or the market participants are already busy positioning for the event. Whatever the case might be, I do believe it’s better to prepare than to do nothing, because of it, in the end, this week is the FOMC meeting time, and it’s still a high-risk event.

fomc meeting time

U.S. Data Has Improved Since the December Meeting

U.S. economy has grown relatively well compared to Europe for example. Most of the leading indicators, such as PMI’s, have been mostly above the 50 level for many years now. For instance, the last time ISM Non-Manufacturing PMI was below the boom/bust line, was at the end of 2009. In other words, the U.S. services sector has grown for more than seven years in a row.

On the other hand, ISM Manufacturing PMI hasn’t been as stable as the Non-Manufacturing PMI. The first one mentioned has been below the 50 line several times since 2009 but it has always recovered. The biggest slowdown in economic activity in the manufacturing sector took place at the end of 2015 and in the beginning of 2016. Back then, the index stayed below the 50 level for four months in a row.

But coming back to the more recent history, I’d say both indices look very good. In December, activity in the manufacturing sector reached a new, 24-month high and came in at 54.7 (January release). ISM Non-Manufacturing didn’t make any new highs but it stood at a strong 57.2 level indicating that the services sector is doing just fine and this will matter for the upcoming FOMC schedule.

Non – Farm Payrolls Looking Healthy

Regardless of the fact that the Non-Farm Payrolls missed their target (175K) in January, the actual figure was nothing but solid. The U.S. labor market is still strong and keeps on growing. What was even better, was the fact that the previous number, 178 000, was revised to 204 000. That kind of upward revision was like special delivery, exactly for the FOMC meeting time.

The only issue that remains is the labor force participation rate. That one still remains near the 63 percent (62.7). Back in 2006, the index was slightly above 66%, so in other words, there’s quite a lot of ground to cover. Of course, since the LFPR is so low, it’s hard to believe that the actual unemployment rate is as low as the data shows (4.7%).

Economists have proposed several explanations of why the labor force participation is so low. One of the factors is believed to be related to the fact that the generation “baby boomers” are getting older and have started to retire. Others say, that it’s related to the severity of the 2008 crisis that simply pushed millions of people to the sidelines, discouraging them from even looking for work.

It’s the FOMC Meeting Time

In other words, Janet Yellen and the rest of the committee members should be quite happy with the current situation. Besides the healthy labor market and an increase in both the services and manufacturing sectors, we’ve also seen higher retail sales since the last meeting. In addition, personal spending also increased slightly but it was overshadowed by the drop in New Home Sales.

All in all, everything is set for the FED to either continue with the tightening or stay on the sidelines. There are very few reasons for them to be overly dovish on Wednesday. One thing that might be mentioned is the strength of the US dollar. But if they are keeping their current forward guidance then it’s rather difficult to simply “talk the dollar lower”.

The main things to look for in the statement are hints about the potential next rate hike and anything related to the USD appreciation. Also, keep an eye out for any comments related to Donald Trump and his fiscal stimulus plan. We nor the Federal Reserve System members do not know how or when (or if ever) it’s going to be implemented.