NEWS STORIES OF NOTE FROM OVER THE EU & US SESSIONS: USD surged after FOMC announced to begin balance sheet normalization in October and dot plot showed more committee members forecast another hike by year-end

FOMC
•    The FOMC confirmed plans to begin shrinking the balance sheet in October, following the schedule set out in June. 
•    The Fed kept the FFR unchanged at 1.00% - 1.25%, as expected. 
•    More on the committee favoured another rate hike by the end of this year (11 vs. 8 in June).
•    Fed downgraded near-term core PCE while lowering long run FFR, however, median still calls for 3 hikes in 2018.
•    The USD strengthened and yields rose after the decision as markets have to reprice expectations of hikes

FOMC kept Fed funds rate at 1.00% - 1.25% as expected and confirmed plans to shrink the balance sheet in October following schedule laid out in July as expected. 
Note: FOMC suggested a plan where it will allow USD 6bln of maturing treasuries and USD 4bln of maturing MBS to roll off per month for a 3-month period.

FOMC Summary of Economic Projections for Median Fed Funds Rate: 
2017: 1.4% (Prev. 1.4%)
2018: 2.1% (Prev. 2.1%)
2019: 2.7% (Prev. 2.9%)
2020: 2.9%
Longer-run: 2.8% (Prev. 3.0%)
Dot plot also showed 11 of 16 policymakers see one more hike in 2017 (Prev. 8).

PCE
2017: 1.6% (Prev. 1.6%)
2018: 1.9% (Prev. 2.0%)
2019: 2.0% (Prev. 2.0%)
2020: 2.0%
Longer-run: 2.0% (Prev. 2.0%)

Fed Chair Yellen said effects holding down inflation should be transitory and that the Fed is taking into account movements in asset prices in deciding rate hikes. Yellen also added that if the FOMC tightens too quickly then a fall in inflation may become persistent and recession risks may emerge. (Newswires)

The Fed decision was ultimately seen as more hawkish with some suggesting that the downgrade to inflation forecast may not have been as large as some analysts had expected. Furthermore, despite the lowering of long run FFR projections, markets focused on increased expectations of another hike this year as the number of committee members that favoured a hike by year end increased to 11 from Prev. 8 in June. 


US

Senate Republican Leader McConnell plans to bring the Graham-Cassidy healthcare bill up on Senate floor next week. (Newswires)


UK

UK Retail Sales MM (Aug) 1.0% vs. Exp. 0.2% (Prev. 0.3%, Rev. 0.6%). (Newswires)
UK Retail Sales YY (Aug) 2.4% vs. Exp. 1.1% (Prev. 1.3%, Rev. 1.4%)

BoE's McCafferty warned UK economy likely to go through "slow-motion economic slowdown", sees growth around 1.5% per annum. (Newswires)


EU

ECB's Knot said that the Euro-area needs a re-calibration of policy and that the main rationale for ECB asset purchases has vanished. (Newswires)

Greece looking at conducting a bond swap, replacing 20 issued in 2012 with four or five new ones, according to sources. (Newswires)


COMMODITIES

US EIA Weekly Crude Stocks (w/e) 4.591M vs. Exp. 3.493M (Prev. 5.888M). (Newswires)
- US crude production rose 1.68% to 9.510mln bpd

Algerian Energy Minister said OPEC is to discuss output cut extension at meeting on 22nd September. (Newswires) 


MARKET RECAP

The FOMC confirmed plans to shrink the balance sheet, beginning in October, while keeping interest rates unchanged at 1.00% - 1.25%. These decisions did not come as a surprise with markets then focusing on the Fed’s Summary of Economic Projections. More on the FOMC (11 from 8 in June) forecast another rate hike by the end of 2017, while the downgrades to the Fed’s inflation forecast may not have been as large as some had expected. This sent yields higher across the board with 10y yields up as much as 4bps, and 2y yields rising to 9-year highs. Finally, Dec’17 10y T-notes futures settled at 125.20, down 11+ ticks.

Equity markets initially sold off but managed to bounce as participants bought the dip. The NASDAQ 100 underperformed, weighed on by Apple, after a Rosenblatt note suggested that the company was struggling with iPhone 8 pre-orders and that they were having issues with Apple Watch connectivity. The S&P 500 closed up 0.06% at 2508.14, the NASDAQ 100 closed down 0.29% at 5973.60, and the Dow closed up 0.18% at 22410.56.

The USD was stronger across the board following the Fed decision with USD/JPY rising to its highest since mid-July. The NZD also held up pretty well after the latest election poll showed the National Party overtaking Labour ahead of this Saturday’s election. The USD-index was on track for its biggest daily gain in 8 months.

Gold sold off after the Fed, briefly dropping below USD 1300/oz, although bounced and hovered around that level heading towards the close. The DoE crude oil inventory data was broadly in line with expectations and failed to give the market too much direction, although as markets continue to digest Trump’s UN speech and speculate on an end to the Iran nuclear deal, WTI and Brent crude futures pushed higher.
 

20 Sep 2017 - 22:03- Fixed IncomeBank Speaker- Source: RANsquawk

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