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Citi’s FX guru Steven Englander is out with a note titled: What can go wrong in the next 11 days?What’s 11 days all about? That gets us to May 3, the date of the next ECB meeting.
Given the heightened concern over Spain and Italy these days, this meeting takes on special importance.
A major risk is the risk of non-action:
The ECB doesn’t announce any measures for Spain and Italy
The next ECB meeting (May 3) is critical for both euro optimists and pessimists. German yields are at record lows, euro zone bank stocks are at almost-record lows and sovereign spreads are widening (Figure 2). European policymakers very likely thought they had a break from crises after the Greek debt package and PSI were rammed through. The rapid advent of the Spanish crisis, its spread to Italy, new concerns on the Netherlands and very poor economic data have caught them flat-footed and so far there is no indication that any policy response is thought to be needed.
Before then, of course, we get our Fed meeting that wraps up Wednesday, to which Englander identifies risk of a hawkish tilt:
Now consider the risks that accompany Wednesday’s FOMC. Our economists write: “Fed officials are expected to reaffirm the need for a highly accommodative monetary policy ‘at least through late 2014.’ The Committee has set hurdles for additional QE-type asset purchases and at this meeting is not likely to resolve plans beyond the scheduled completion of Operation Twist.” If the unexpectedly they shift the timing of the expected Fed hike to earlier in 2014, or even if “at least through late-2014” becomes “through late 2014”, we are likely to see pressure on bond markets, FX risk and very probably all risk correlated assets, — to a limited degree if “at least” is dropped, and much more strongly if the timing is changed. Very likely they will reiterate the previous timing, as our economists expect. Even for those of us who still think there is a significant chance of additional stimulus, the chance of misunderstood language at this meeting seems very high, when it is very unlikely that additional measures will be announced.
What may be a bigger risk is that some Fed governors and regional Fed presidents shift their expectation of tightening to earlier. When the last FOMC projections were published in January, three FOMC participants saw a need to tighten in 2012 and six in 2013. Six participants saw no need to tighten until 2015 or beyond. If there is a shift in this distribution to earlier and tighter, investors may interpret the drift in the projections’ centre of gravity as an early Fed-warning signal. Given the pricing in the fixed income market, this could easily be viewed as an stealth indication of tightening risk.
Of course, we’ll be covering it all, LIVE!