FOMC Minutes Signal Rate-Hike “Soon”, Economic Weakness Probably “Transitory” But Need “Evidence”

Having top-ticked US economic data with its March rate-hike, all eyes are on the May minutes to confirm the total lack of data-dependence now present at The Fed. The main focus of the minutes was on the ‘normalization’ of the balance sheet (since June hike odds are at 100%), which was confirmed with details of the plan revealed. Economic weakness in Q1 was shrugged off as “transitory” – although with the provision that evidence is needed – and tightening as well as balance sheet rolloff is appropriate “soon”, likely signaling that a June rate hike is on despite the recent economic slowdown. Fed also warns of asset valuations.

Key Minutes Headlines:


The Minutes had something for everyone, starting with the “dovish cop“, and the focus on the triple reiteration of “weakness” in the FOMC minutes, and furthermore the warning that Q1 GDP weakness was not due to seasonality:

The staff judged that the weakness in first-quarter real GDP was probably not attributable to residual seasonality and that it instead reflected transitorily soft consumer expenditures and inventory investment.

Another risk factor: the Fed expected PCE inflation to pick up more the spring “which would be more consistent with ongoing gains in employment.” It did not happen…

Importantly, PCE  growth was expected to pick up to a stronger pace in the spring, which would be more consistent with ongoing gains in employment, real disposable personal income, and households’ net worth.

The Fed also wanted move evidence the slowdown is transitory:

Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.

However, we then quickly shift to the “hawkish cop” because ironically, just a few lines lower, the Fes does blame the weather:

It was noted that much of the recent slowing likely reflected transitory factors, such as low consumer spending for energy services induced by an unusually mild winter and a decline in motor vehicle sales  from an unsustainably high fourth-quarter pace. Nevertheless, contacts expected that demand for motor vehicles would be well maintained.

The outlook is also expected to improve:

With respect to the economic outlook and its implications for monetary policy, members agreed that the slowing in growth during the first quarter was likely to be transitory and continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term.

Sure, it could also be inducted by the collapse in demand for auto and credit card loans as the Fed itself discovered just a few days after the May FOMC meeting in its latest Senior Loan Officer Survey, and reported previously here.  Yet despite the Fed’s growing concern about “weakness”, its conclusion was that gradual tightening remains appropriate:

Although the data on aggregate spending and inflation received over the intermeeting period were, on balance, weaker than participants expected, they generally saw the outlook for the economy and inflation as little changed and judged that a continued gradual removal of monetary policy accommodation remained appropriate.

As for employment and inflation…

Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were judged to be roughly balanced. The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially were seen as roughly  counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.

Also notable is the Fed’s explicit warning that “vulnerabilities have increased for asset valuation pressures.”

This overall assessment reflected the staff’s judgment that leverage as well as vulnerabilities from maturity and liquidity transformation in the financial sector were low, that leverage in the nonfinancial sector was moderate, and that asset valuation pressures in some markets were notable. Although these assessments were unchanged from January’s assessment, vulnerabilities appeared to have increased for asset valuation pressures, though not by enough to warrant raising the assessment of these vulnerabilities to elevated.

* * *

“In addition, it was noted that real estate values were elevated in some sectors of the CRE market, that a sharp decline in such valuations could pose risks to financial stability, and that potential reforms in the housing finance sector could have implications for such valuations.”

So…  the prices are too high?

The Fed also touched on deregulation risks:

“With regard to financial stability, several participants emphasized that higher requirements for capital and liquidity in the banking system and other prudential standards had contributed to increased resilience in the financial system since the financial crisis. However, they expressed concerns that a possible easing of regulatory standards could increase risks to financial stability. “

And on the future balance sheet “renormalization” and runoff:

“Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month. As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve’s securities holdings would become larger. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.

*  *  *

If The Fed somehow makes believe that the data “continues to support” normalization, then their credibility just went negative…


Data-dependence? The Fed is still calling for 2 more rate hikes, the market sees just 1.44 hikes…


So what happens when The Fed balance sheet normalization begins?


June rate hike odds were 100% before the Minutes (and 50% chance of anmother hike by December – 39.3% + 9.6%)


Full Minutes Below…


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Israeli forces assault, detain 2 children on their way home from school

At least two Palestinian children were beaten and detained by Israeli forces on Wednesday morning inside the Aida refugee camp, located in the northern part of Bethlehem city in the southern occupied West Bank. Witnesses told Ma’an News Agency that Israeli forces raided the camp in military jeeps at around 9:30 a.m. while students from the camp’s United Nations Relief and Works Agency (UNRWA) school were returning home from their final exams. The soldiers then got out of their jeeps near the camp’s cemetery and assaulted two students, whose identities remained unknown. After beating the two, the soldiers threw them into the jeep and took them to a military base located adjacent to the camp. “After arresting the two kids, […]

30 refugees drown in new Mediterranean disaster

Wed, 2017-05-24 15:12

ROME: At least 30 migrants including young children drowned Wednesday when they fell off an overloaded vessel in the Mediterranean, where tensions are rising between aid ships and the Libyan coast guard.
“There’s a critical situation today. About 200 people fell into the water,” a coast guard spokesman told AFP, while a humanitarian worker at the scene said 31 bodies had been recovered.
The migrants were on a wooden boat carrying between 500 and 700 people and were just 20 nautical miles off the Libyan coast when the accident happened.
The crew of the Phoenix aid boat, chartered by the Maltese NGO Moas, had begun the rescue and were distributing lifejackets when many of those on deck fell into the water, perhaps knocked off balance by a wave.
“Not a scene from a horror movie… Real life tragedy unfolding on Europe’s doorstep today!,” said Chris Catrambone, Moas co-founder, who was aboard the Phoenix and published photos showing white body bags lined up on the deck.
“Rescuers are frantically trying to break open the locked hold on a wooden boat where hundreds of migrants are trapped!” he tweeted.
With the help of an Italian coast guard ship and several commercial ships, rescuers raced to drag as many people as possible from the water, while a military aircraft dropped life-rafts and a helicopter looked for survivors.
“Current body count at 31,” Catrambone said, adding many who fell overboard had been “small toddlers.”
About 15 relief operations were under way Wednesday off Libya in total, the coast guard said.
On Tuesday, they coordinated the rescue of about 1,500 people, while their Libyan counterparts intercepted 237 others, including 20 women and 15 children, traveling on two wooden boats.
Among the migrants was a group of 12 Libyans — including five women and three children — who were trying to flee the conflict-hit country. Libyans have been a rare sight on migrant boats so far.
The German NGO Jugend Rettet said Tuesday it had had a run-in with armed men on a boat purportedly commandeered by the Libyan coast guard.
The Libyan boat already had passengers on board — presumably picked up from a dinghy in the area.
Jugend Rettet published a photograph appearing to show the armed men pointing their weapons directly at the migrants and said “a variety of shots” were fired “and refugees were beaten.”
Some 100 people on the Libyan boat panicked when the shots rang out and threw themselves into the water, swimming toward the German boat Iuventa and the SOS Mediterranee boat Aquarius, which was also at the scene.
“We can not say whether and how many dead there were in the shooting. We had to be careful not to get a bullet ourselves,” Jugend Rettet said in a statement citing the Iuventa’s 25-year old captain Jonas, without giving his surname.
The Libyan coast guard has recently begun carrying out its own operations at sea, towing migrant dinghies headed for Europe back to shore and locking up those recovered in centers which are renowned for human rights abuses.

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US enlists top lawyer for Russia probe

Wed, 2017-05-24 03:00

WASHINGTON: President Donald Trump has enlisted his longtime attorney Marc Kasowitz in a still-forming outside legal team that will represent him in the investigation into Russian interference in the US election.
Kasowitz, who has a history of working on Trump’s most nettlesome legal issues, will likely be part of a group of outside lawyers, according to two people familiar with the deliberations.
Trump and top White House advisers have been considering whether to fill out the team with lawyers with deep experience in Washington investigations, as well as crisis communication experts, said the people, who demanded anonymity because they are not authorized to disclose personnel moves publicly.
Neither Kasowitz nor the White House responded to requests for comment.
Kasowitz is a New York attorney who also represents ousted Fox News personality Bill O’Reilly.
He is been a lawyer for Trump since the early 2000s. Trump heaped praise on him and his firm in an August 2004 article in American Lawyer, calling them “phenomenal lawyers.”
At the time, Kasowitz and David Friedman, the firm’s bankruptcy head, had been advising Trump on his Atlantic City casinos. “They’re highly talented with great insight into the future,” Trump said. As president, Trump chose Friedman as the US ambassador to Israel.
Kasowitz’s work with Trump also has included threatening and filing lawsuits after unflattering media coverage of the businessman-turned-president.
He was involved in cases against Trump’s now-defunct Trump University. The Trump Organization ultimately agreed to a $25 million settlement with customers who claimed they were misled by failed promises to teach success in real estate.
Kasowitz is the founding and managing partner of Kasowitz Benson Torres, a large legal firm that also employs former Sen. Joe Lieberman, whom Trump recently interviewed as a potential head of the FBI.
Last week, the Justice Department appointed former FBI director Robert Mueller as special counsel to lead a federal probe of allegations that Trump’s campaign collaborated with Russia to sway the 2016 presidential election. Mueller’s broad mandate gives him not only oversight of Russian interference but also of “any matters that arose or may arise directly from the investigation.”
Trump has called the probe “a witch hunt.”

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Nigerian Oil Production To Reach 2.2 Million Bpd By June

The CEO of Nigerian oil company Oando says the worst of the west African country’s output disruptions are over as the twice-attacked Forcados pipeline returns to full capacity by the end of June. National production will touch 2.2 million barrels per day by June as well, Pade Durotoye told reporters at the Africa Independents Forum in London on Wednesday. “We think that the worst is behind us,” he said. “Before the end of June, we will have Forcados back, which would take us comfortably back to 2.2 million bpd.” The first cargo from…

Iran Discovers New Gas Field Next To South Pars

Iran has discovered a new gas field close to the giant offshore field South Pars in the Persian Gulf, Iranian media reported on Wednesday, quoting an unnamed official with the National Iranian Oil Company (NIOC). According to Press-TV the field, called Sepand, has 1.5 trillion cubic feet of sweet gas, of which about 792 billion cubic feet could be recoverable. The new field is independent from South Pars, which Iran shares with Qatar, the NIOC official told media. It is not yet clear if the newly discovered gas field is also shared with Qatar,…

Iran Discovers New Gas Field Next To South Pars

Iran has discovered a new gas field close to the giant offshore field South Pars in the Persian Gulf, Iranian media reported on Wednesday, quoting an unnamed official with the National Iranian Oil Company (NIOC). According to Press-TV the field, called Sepand, has 1.5 trillion cubic feet of sweet gas, of which about 792 billion cubic feet could be recoverable. The new field is independent from South Pars, which Iran shares with Qatar, the NIOC official told media. It is not yet clear if the newly discovered gas field is also shared with Qatar,…

Venezuela leader defies demos, launches constitution overhaul

Wed, 2017-05-24 06:52

CARACAS: Venezuela’s President Nicolas Maduro formally launched moves to rewrite the constitution on Tuesday, defying opponents who accuse him of clinging to power in a political crisis that has prompted deadly unrest.
At an open air rally before thousands of supporters wearing red t-shirts, Maduro signed a document formally establishing the terms for electing members of a “constituent assembly” that will be tasked with drafting a new constitution.
His backers waved red, yellow and blue national flags in defiance of angry opposition protests after the death toll from weeks of clashes reached 53.
Elections to the new assembly will take place at the end of July, the National Electoral Council President Tibisay Lucena later said in a televised statement.
He said gubernatorial elections pending since last December would take place on Dec. 10 this year.
The opposition-controlled National Assembly promptly rejected Maduro’s plan.
“The Venezuelan people do not want a fraudulent Madurist constitution and we will not accept it,” opposition leader Henrique Capriles tweeted.
Violence has appeared to intensify in recent days with daily opposition marches calling for early elections.
Crowds doused a man in fuel and set him alight at a demonstration on Sunday. Another three people died from gunshot wounds late Monday in riots in the western state of Barinas.
The government and opposition accuse each other of sending armed groups to sow violence during demonstrations.
Maduro has accused the opposition of “terrorism,” resisting its calls for a vote on removing him from power.
The opposition blames him for an economic crisis that has caused major shortages of food, medicine and other basic goods amid soaring inflation.
It says he plans to pack the “constituent assembly” with his supporters.
Maduro said 176 of the assembly’s members will be drawn from certain civil groups, which the opposition say are traditionally loyal to him and his late predecessor Hugo Chavez.
In a move set to further inflame the opposition, Maduro said the constitutional body would sit in the chamber of the National Assembly legislature — the only state institution nominally controlled by his opponents.
“What Nicolas Maduro has announced is nothing but a continuation of a coup against the constitution,” said the opposition speaker of the legislature, Julio Borges.
“This National Assembly calls on Venezuelans to continue peaceful protests morning, noon and night in all corners of Venezuela until the constitution is respected.”

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