Fed Minutes Cite ‘Intensified’ Trade Risks, ‘Very Strong’ U.S. Economy

Here come the June Fed minutes.

These have the potential to be interesting (assuming any human traders are around to read them and be interested in this holiday week) in light of the characteristically vociferous debate about exactly what the June statement and the updated SEP and dots hold for the future.

China’s decision not to follow the Fed last month and the ensuing RRR cut underscored the policy divergence theme at a time when trade tensions were already weighing on sentiment around the yuan. Given that, any further color that suggests the Fed views risks to the outlook as transitory and is committed to hiking a total of four times in 2018 come hell or high tariffs would be notable.

Needless to say, weakness in the yuan has been front and center for the market since the Fed meeting, and further indications of policy divergence would potentially put more pressure on the Chinese currency ahead of Friday’s payrolls data in the U.S. and of course the official implementation of tariffs.

“We expect a positive tone from the June FOMC minutes and look for them to explain members’ rationale for hiking rates and signaling further steepening of the rate path. Of particular attention is the discussion of risks to the outlook in light of Chairman Powell’s confidence against the rising threat of protectionism,” Barclays wrote last weekend.

Ah, yes – “Chairman Powell’s confidence against the rising threat of protectionism”. You might recall that his comments at Sintra last month indicated that he might be getting a bit less “confident.” But don’t tell that to Wilbur Ross (or his proprietary soup can index).

Here’s BofAML’s take on the minutes:

We will look for further discussions around the amount of further policy firming necessary in the current hiking cycle as the May minutes noted that there were a “range of views” but didn’t expound further. Dovish participants will likely support slowing when reaching “neutral” while more hawkish participants will argue that the stance of policy could turn restrictive as growth remains above trend and inflation above the Fed’s symmetric target. Also, we will look to see how concerned participants are regarding the rising trade tensions and discussions around the potential impact to their economic outlook and the path of policy. In this regard, the details of the Summary of Economic Projections which reveal how the uncertainty and risks to the outlook have evolved since the March projections will be noteworthy.