Key takeaways
The Fed is in a difficult position amid slower growth and still high inflation. Given the weak jobs report and lower-than-anticipated inflation in August, we expect the Fed will refrain from providing more details at this meeting, as the Fed has already made it clear that tapering is set to begin before year-end.
We believe the tapering pace is more important than the timing. We continue to expect that tapering will be concluded in mid-2022.
We expect the Fed to raise the ‘dots’ by signalling the first rate hike in 2022 (up from 2023 currently). We still expect the first rate hike in H2 2022 in either September or December.
Fixed Income: We expect the imminent market reaction should be muted in the US fixed income market if we (and consensus) are right. However, we see risks tilted to the upside. We still forecast 10yr US Treasury yields in 2.0% in 12M.
FX: The continued push towards tighter global liquidity conditions (Chinese deleveraging, ECB fading PEPP and Fed tapering) is positive for the dollar. We continue to see downside risks to EUR/USD over the coming year, targeting 1.15 in 12M (1.13 in 15M).
