FOMC kept rates on hold as Exp., updated guidance on balance sheet normalisation and perceived to be dovish on inflation

Market reaction led to a softer USD, yields and upside in gold with sentiment bolstering Asia-Pac equities

Looking ahead, highlights include US Durables, Wholesale Inventories and Weekly Jobs

FOMC DECISION

FOMC held rates between 1.00-1.25%, as expected and said balance sheet normalisation is to take place ‘relatively soon’.

On inflation, the Fed said it is monitoring inflation developments closely and that inflation will remain somewhat below 2% in the near term, but stabilise around 2% in medium-term.

Although there was no major immediate reaction, the USD softened in the following minutes, with all of the major FX pairs moving to best levels on the day against the USD, with focus on the inflation comments. Yields fell to session lows and spot gold moved to session highs.

ASIA

Asia equity markets were mostly higher following the gains on Wall St, where stocks marginally extended on advances amid earnings and following a somewhat dovish-perceived FOMC. As such, mild upside was observed in ASX 200 (+0.3%) and Nikkei 225 (+0.1%), with the former led by strength across the commodities complex. Elsewhere, Shanghai Comp. (-0.3%) and Hang Seng (+0.4%) traded mixed with underperformance in the mainland bourse after the PBoC reduced its liquidity operations, while participants also digested mixed Industrial Profits data. 10yr JGBs were higher despite the mostly positive tone in the region, as yields tracked the declines in their US counterparts following the aforementioned FOMC, while today’s 2yr auction results failed to impact prices as the results were mixed.

China Industrial Profits (Jun) Y/Y 19.1% (Prev. 16.7%); YTD (Jun) 22.0% (Prev. 22.7%). (Newswires)

PBoC injected CNY 60bln 7-day reverse repos. (Newswires)

PBoC set CNY mid-point at 6.7307 (Prev. 6.7529)

EUROPE

ECB's Nowotny (neutral) said discussions have begun about tightening policy and it would be reasonable to reduce volume from January 2018. Nowotny said he does not expect QE to be stopped at year-end without a replacement. (Newswires)

UK

UK Home Secretary Rudd said the government would seek a transitional Brexit arrangement, which would likely to include free movement to avoid a “cliff edge” for employers or EU nationals in the country. (Guardian)

FX

The greenback was pressured following the FOMC in which the Fed was perceived more dovish than expected and stated that inflation will remain somewhat below 2% in the near term. This benefitted its major counterparts in which EUR/USD and GBP/USD reclaimed the 1.1700 and 1.3100 handles respectively, while AUD/USD surged to its highest in 2 years as gains in commodities also underpinned. Elsewhere, USD/JPY extended on losses to below 111.00, while CNY was bolstered after the PBoC set the strongest reference rate since October.

COMMODITIES

Gold (+0.2%) prices held near 6-week highs amid upside across commodities as the USD softened post-FOMC. Elsewhere, copper held on to the prior session gains, while WTI crude futures remained firm post-DoE and lingered around 8-week highs.

Goldman Sachs raised 3-month iron ore price target to USD 70/ton due to stronger than expected demand and raised end-2017 target to USD 60/ton from USD 55/ton. (Newswires)

US

Post-Fed US 10-year yields moved and consolidated below 2.30%. The treasury complex had previously garnered support from a decent enough 5-year auction. As a result, Sep’17 10y T-note futures settled at 126.00+, up 14 ticks.

The Senate have rejected the repealing of Obamacare with a 45-55 vote, subsequently casting doubts over whether the Republicans will be able to get 50 votes to pass a bill of any kind. (Newswires)