• Fed hiked by 25bps as Exp. & outlined plans for balance sheet normalisation, expects inflation and growth to pick up
• Subsequently seen as more hawkish than anticipated; support for US yields, USD, equities hampered before recovering into the close
• Looking ahead, highlights include SNB & BoE rate decisions, US weekly jobs and Philly Fed

Fed Interest Rate Decision

• The Fed hiked rates 25bps to 1.00%-1.25% as expected; Kashkari was the lone dissenter.
• Fed officials: 8/16 see one more hike in 2017, with 4/16 seeing two for the remainder of the year. Dot plot largely unchanged

Fed Balance Sheet Plans

• Fed expects to implement balance sheet normalization this year, initially trimming re-investments in Tsy securities by USD 6bln/month, and MBS by USD 4bln.
• Fed said the cut to reinvestment seen is expanding on a quarterly basis until it reaches USD 30bln/month for Tsys and USD 20bln for MBS.
• Fed didn’t specify the long-run size of the balance sheet, but said it would suspend normalisation if economic conditions change.

Yellen Press Conference (Fed’s Yellen Stated:)

• Economic growth appears to have rebounded after the first quarter slowdown.
• Expects inflation to move up, and stabilize around 2% and the FOMC is monitoring inflation developments closely.
• Additional gradual rate hikes will be appropriate over the next few years.
• The Fed expects to begin implementing balance sheet plan this year.

Reaction

• The release was overall seen as slightly more hawkish than anticipated given plans for reinvestment adjustments and the Fed overall upbeat about data despite recent disappointing numbers
• This stopped the rot seen in US treasury yields after yesterday’s retail sales and CPI with USD supported and some downside in the S&P 500 before recovering into the close

ASIA

A cautious tone gripped Asia with most major bourses negative following a similar showing in US, after the Fed hiked rates as expected but caught markets off guard with details on how it expects to begin its balance sheet normalization. This dampened ASX 200 (-1.3%) and Nikkei 225 (-0.3%) from the open, with underperformance in the former due to a commodity rout in which WTI crude futures fell over 3% on a narrower than expected draw in headline DoE stockpiles. Hang Seng (-1.1%) was also among the laggards after the HKMA raised base rates in response to the Fed hike and warned of property sector risks, while the Shanghai Comp. (-0.1%) traded choppy with downside stemmed by a firm liquidity effort by the PBoC and as participants digested the latest mixed loans and financing data. 10yr JGBs were higher amid a cautious risk tone in the region and the BoJ’s presence in the market for nearly JPY 700bln of JGBs, while the curve flattened as the super-long end outperformed.

PBoC injected CNY 50bln in 7-day reverse repos, CNY 40bln in 14-day reverse repos and CNY 60bln in 28-day reverse repos.

PBoC set CNY mid-point at 6.7852 (Prev. 6.7939). (Newswires)

EUROPE/UK

The UK is considering sweetening its offer to Brussels over European Union citizens' rights by allowing them to bring non-EU spouses into the UK after Brexit. (Telegraph)

UK Chancellor Hammond is set to publicly make the case for a new path for Brexit which will see assurances for job protection and economic growth in what is perceived to be a push for a ‘soft’ Brexit. (Newswires)

FX

Antipodean currencies took centre stage amid key data releases, including New Zealand Q1 GDP which missed expectations and pressured NZD, while AUD outperformed on stellar jobs data as Employment Change surpassed estimates, fuelled by a surge in Full-Time jobs which pushed the Unemployment Rate to a 4-year low of 5.5%. Elsewhere, the other majors were relatively quiet overnight with the greenback holding to the FOMC-inspired gains after the Fed was deemed more hawkish than anticipated.

Australian Employment Change (May) M/M 42.0K vs. Exp. 10.0K (Prev. 37.4K)

Australian Unemployment Rate (May) M/M 5.5% vs. Exp. 5.7% (Prev. 5.7%)

New Zealand GDP (Q1) Q/Q 0.5% vs. Exp. 0.7% (Prev. 0.4%)

New Zealand GDP (Q1) Y/Y 2.50% vs. Exp. 2.70% (Prev. 2.70%)

COMMODITIES

Oil failed to recover from yesterday’s post-DoE slump, in which a narrower than expected drawdown in headline crude and surprise build in gasoline stockpiles dragged WTI crude futures firmly below USD 45/bbl. Elsewhere, gold (+0.3%) was supported overnight by safe-haven flows to nurse some of the losses seen from a somewhat more hawkish than anticipated FOMC, while copper benefitted from mild short-covering and rebounded off worst levels.

US

Treasuries were initially bid following weak CPI and retail sales data, although gains were pared after the Fed hiked rates, as some interpreted the run-off plans as a touch hawkish. That said, 2s10s continued its recent flattening, narrowing beneath 80bps to the lowest levels since September. US Sep 17 T-Note Future settled 2 ticks higher at 126.31.

Special Counsel Mueller is reported to be investigating US President Trump for possible obstruction of justice. (Washington Post)