The following hit inboxes across the land earlier this morning and I offer in addition TO what the rest of what global Wall Street is saying and selling … and I do so for the visual of the yield curve and WHAT HAPPENS NEXT in context of prior QE cycles.
Nordea SAYS
We see the Fed signaling a swifter tapering starting in January concluding in March, in turn allowing for a quicker rate liftoff! The macro backdrop allows for higher dots and a hawkish tone. Tail risks include Powell bringing a May hike to life.
Highlights
We expect the Fed to hike three times in 2022 (June, September and December)
The FOMC will almost surely “double down” on its tapering pace
We see the Fed dots showing a median of 2 and 3 hikes in 2022 and 2023
Prospects of tighter USD liquidity and curve flattening will support the dollar outlook
… The future of the balance sheet remains a dark horse. While touching the question about reducing the balance sheet would certainly be more hawkish it is of course also less likely. Nonetheless, we do find compelling arguments on why the Fed would be motivated to consider hinting a run-off in H2 2022. First of all, the recent repricing of the short-end has come with a significant flattening of the curve (especially in 2s10s and 5s30s) as well as shorter market implied policy cycles (see Euro$ in chart 1), resulting in overall very low long US real yields. Another concerning consequence would be curve inversion – which a balance sheet run-off could alleviate according to Kansas City Fed. Secondly, a quicker run-off will alleviate the scarcity of collateral vs. liquidity and improve overall UST market liquidity. This is definitely not our base case, we think the Fed may opt to bring this up in the spring, but it certainly remains a tail risk. For now aggressive front end pricing will continue to flatten the curve.
Chart 4. The flattening will continue
In conclusion, we continue to see a strong dollar. Powell and Co. will most likely meet hawkish expectations going into this week’s FOMC, and may even exceed expectations on the dots plot. Brining a May hike to life is another risk. Moreover, squeezed liquidity induced by a quicker tapering as well as the debt ceiling resolution should help the bid tone on USD as well. Any comments on the balance sheet run-off plans would further fuel hawk outcomes.
For somewhat more, also see, When the Fed hikes: what happens next?