Welcome to The Signal’s “Macrocast.” Each week, we provide analysis and forecasting on the most important upcoming central bank communications.
Forecast: Minutes, speeches to signal rate path
Analysis: Coming off the most hawkish* Fed statement since January, we expect to see a fairly hawkish set of minutes this week: projected residual score** ~0.45. If the actual score is much higher, a September hike may still be a possibility; if it’s much lower, then the Fed will likely hold until December–at least.
The speeches from Lockhart, Bullard, and Williams this week will also clarify the Fed’s stance.
While Lockhart has been relatively quiet the past several months, his sentiment trends have (more or less) walked in step with the committee as a whole over the last year. It will be interesting to see if he continues this pattern.
After a dovish dip earlier this summer, Bullard’s trend has leveled off in modestly dovish territory. While he has the lowest dot on the dot plot–implying just one hike through the end of 2018–any significantly hawkish sentiment from him this week would suggest a possible revision in his rate path come September.
May was the last time Williams gave an official speech. Although he was hawkish at the time, much has happened since–including significant fluctuations in the Fed’s mood–so we don’t see his prior trend as particularly indicative of his current thoughts. Although his speech will be delivered after market close on Thursday, expect markets to be attentive as many see Williams as a proxy for Yellen. That said, Williams gave a detailed interview just last week, and this may dim the spotlight.
Reserve Bank of Australia
Forecast: Minutes will likely be dovish
Analysis: Fed aside, the RBA is the only other bank publishing consequential communications this week. The minutes from the August 2 meeting will be released today, and we expect they’ll reflect the strong dovish sentiment we saw out of that meeting, which scored -2.17 (raw) and -1.64 (residual). If they do, expect the minutes to score around -1.0 (raw) and -1.5 (residual). However, if there’s a hawkish surprise, the RBA may be done with easing for the time being.
The Signal Team
* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness.
** The momentum is the average of the last ten residual scores. Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications.