BMO On The Setup Into FOMC

BMO note that "the Fed's challenge tomorrow is formidable to be sure. Not only does the Committee need to acknowledge the outperformance of inflation versus expectations while providing assurances that the phenomena is temporary, but also characterize the risks presented by the delta variant. The former is assumed at this point given the Chair's Congressional testimony, it's the latter that introduces the bigger market risk. Historically, the Fed has erred on the side of being more, rather than less, dovish - all things considered. The June FOMC meeting was the decided exception to this rule; a shift made even more market-moving given the efforts expended to communicate the parameters of the new policy framework."

• "We've been on about how there is a meaningful risk that the bulk of the economic data this week is simply ignored in favor of responding to the developments related to the delta variant. This was a much easier call during for the first half of the week and investor datapathy will be put to the test via Thursday's growth figures for the second quarter. For the Fed to correctly level-set expectations during the second half of the year, Powell will need to nod to the stimulus-inspired nature of the initial leg higher in consumption recently seen as well as the risks surrounding the probability of maintaining this trajectory. To suggest this will be a delicate balance would be an understatement. The market's willingness to continue down the path of transitory with the FOMC has always been in question and Wednesday presents another litmus test."
• "In terms of translating this directly into a move in U.S. rates, watching the initial response in the 5-Year sector will be our departure point. There is plenty of dovishness already priced in. Should Powell deliver (or overshoot) on the dovishness, the kneejerk will be a steepener - potentially accompanied by higher outright 10- and 30-Year yields. Such an eventuality would be a buying opportunity in the context of a market set to face month-end buying ahead of the what has traditionally been the slowest period of the year for the U.S. rates market. On the flip side, less-dovish skew would risk a policy error kneejerk bull flattener comparable to what's been at play during the last several weeks."