by Calculated Risk on 5/26/2016 07:22:00 PM

A few excerpts from a research piece by Ethan Harris at Merrill Lynch: Fed Watch: June, July or September?

It is now clear that June is very much on the table. What is less clear is whether the Fed is just protesting the super-low probability priced into the markets or is setting us up for a June hike. In other words, should we stick to our September call or flip flop?

We are sticking to September. In our view, the distribution of outcomes is very flat, but September still seems most consistent with Yellen’s high risk aversion. June seems a bit early given how dovish she has sounded. Moreover, with the market pricing in just a 34% chance of a move, it would shock the markets and bring into question their credibility. This would draw attention to the competence of the Fed during an election year. The Fed would also be moving in front of the Brexit vote, a potential serious shock to financial markets. What is the cost of waiting?

July is also live, but suffers the usual problem of not having a scheduled press conference. The Fed has made it clear that they can call a press conference on short notice. However, it would still require meticulous preparation from Yellen. ...

This is a close call and we will be nimble going forward. Payrolls on June 2nd and a Yellen speech on June 6th could change our mind. In our view, the Fed will want the market to be pricing in at least a 50% probability before it moves and hawkish news from these events could do the trick. Regardless of the exact timing, we think the economy and inflation are a lot more resilient than the markets believe. Hence, the Fed is likely to hike more than what the bond market is pricing in over the next several years

Friday:
• At 8:30 AM ET, Gross Domestic Product, 1st quarter 2016 (Second estimate). The consensus is that real GDP increased 0.9% annualized in Q1, revised up from a 0.5% increase.

• At 10:00 AM, University of Michigan's Consumer sentiment index (final for May). The consensus is for a reading of 95.5, down from the preliminary reading 95.8, and up from 89.0 in April.

• At 1:15 PM, Discussion with Fed Chair Janet Yellen, A conversation with Professor Gregory Mankiw, followed by the presentation of the Radcliffe Medal to Chair Yellen. Watch live here.