Goldman: “Everybody Has A Plan Until They Get Hit”

Goldman Sachs note that “over the last couple weeks, it has been clear that the FOMC would like to slow the pace of rate hikes. What is much less clear is whether the data will finally give them a chance to do that. This has generally been the case all year - recall that less than half of the Committee wrote down a single 50bp hike in the March "dot plot", for example. Recently, the data the FOMC has highlighted as important inputs to its decision to slow have continued to show signs of an overheated labor market and strong wage pressures. This week’s CPI report seems very unlikely to offer “compelling evidence” of a slowdown; our economists revised up their core inflation forecasts for this year again on the back of stiffer shelter costs. Our economists still think a step down to 50bp is most likely at the next meeting, but see risks that rate hikes could be more frontloaded. But, with the market still pricing cuts next year, the bottom line is that we still see upside risks to inflation and policy pricing over the next few months.”

• “We recently revised down our EUR/USD forecasts for the next six months given rising risks of a Euro area recession this year. But it is also consistent with our “FCI loop” framework; the U.S. FCI is barely any tighter than just before the WSJ report that the FOMC was considering moving to 75bp increments, so more resilient economic data will need to translate into the market pricing more restrictive policy ahead. Overall, we continue to see upside risks to real yields in the U.S., and downside risks for the ECB. As a result, we think EUR/USD can re-test parity in the months ahead.”