NY Fed President Dudley appears to have stolen any potential thunder in the July FOMC minutes that will be released tomorrow. While we put more emphasis on today’s US retail sales data and the August Fed surveys, many others argued that the minutes were the key report this week. Â
Dudley essentially confirmed what many economists have come to expect. This is that next month; the FOMC announces that it will begin not reinvesting the entire maturing proceeds starting in Q4. The initial pace of $6 bln Treasuries and $4 bln MBS is sufficiently small to be nearly inconsequential, except for the little thing; that it has never been done before. Â
Dudley also indicated that provided the economy continued to remain on course, he could support another hike before the end of the year. This too is very much consistent with survey results, such as the recent Wall Street Journal polls of economists. If anything, the market has moved away from the this, though most of the setback spurred by last week’s CPI report has been retraced. Lastly, we also think it is important that Dudley also included an observation about the easing of financial conditions. Since the spring, and in the light of softer inflation readings, we have seen financial stability arguments have become more prominent in the comments of the Fed’s leadership. Â
Dudley’s comments underpinned US interest rates and the dollar. The US dollar is rising against most of the major and emerging market currencies. A chief exception is a Swedish krona. Firmer than expected inflation has sent the krona higher. Headline CPI rose 2.2% in July from 1.7% in June, and the underlying rate rose to 2.4% from 1.9%. Given Sweden’s growth (Q2 4% year-over-year) and the higher inflation, its monetary policy (minus 50 bp repo rate) seems out of kilter. The krona is at its best level against the euro since March. It is on a trend line drawn off the 2013 and 2016 lows (~SEK9.46). Â
