Weekly Analysis
Typography

As expected, the FOMC meeting left rates unchanged, with a unanimous vote by the Committee, and only marginal changes to the statement, which acknowledges a strengthening of the recovery and higher market inflation expectations. The message is clear: more hikes are coming......

The assessment of the economic picture remains very positive and, as in December, economic activity is described as growing “at a solid pace”. In judging the various demand components, the wording used is compatible with mounting confidence in the growth cycle: “gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low”. On inflation, while acknowledging that it remains below 2%, the Committee stresses that market expectations have recently picked up, although they are still low. Going forward, the FOMC says that “labour market conditions will remain strong” and that “inflation is expected to move up this year”. The press release does not mention the fall in inflation anymore. Risks remain roughly balanced, while the Committee is “monitoring inflation developments closely”.

Given the unchanged macro picture, policy implications are also unchanged. The Committee expects the evolution of economic conditions to “warrant further gradual increases in the federal funds rate”. The only change is the addition of the adjective “further”, which stresses the upside path of rates. 

What the statement does not say is more important than what it says. There is no mention of the dollar, oil prices, tax reform, deficit and debt, nor of tariffs and global trade, nor of the financial markets. The statement ignores all the themes which have come to the fore since December. The minutes will tell of the reasons behind this silence. One is probably the change at the helm of the Fed, with Yellen at her last meeting as chair, to be replaced by Powell next week. Another reason may be uncertainty over the persistence and effects of these factors on the evolution of the scenario. 

The minutes will be important in detecting any changes in opinion on the risks to the growth and inflation scenarios, as well as on the interest rate path. However, in light of the macroeconomic data already at available, the forecast for a fed funds hike in March remains unchanged. 

In any case, the overall picture in six weeks’ time, on occasion of the next meeting, could be rather different from what it is now, on several fronts: dollar, debt ceiling and spending law, NAFTA, financial conditions. Therefore, the FOMC’s silence on the new themes of the year is reasonable, in waiting for developments on all these fronts, which are complementary to the evolution of data, but which could significantly influence the pace of rate hikes in the second half of the year. 

For now, the Committee is refraining from sending messages which could disrupt market expectations, by now almost aligned with the median forecast of three hikes: let sleeping dogs lie (at least until further information will be available). One point is clear, more hikes are on the way.


Appendix
Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d'Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld