US MARKET WRAP – Politics, Politics, Politics & The FOMC

Fallout from the German federal election and New Zealand’s General election were the main stories at the start of a politics heavy session, with uncertainty cast over both governments following their respective results. A further escalation in North Korean-US tensions drove a safe haven bid, although the White House said it has not declared war on Pyongyang in its daily press briefing.

Fedspeak was the focus on the economic side of things. Permanent and influential Fed vote Bill Dudley noted that he “expects 2% inflation over the medium term,” while he is of the belief that “temporary factors depressing US inflation are fading.” He also stuck to the FOMC playbook as he highlighted that he expects “continued gradual tightening of US monetary policy,” as “economic conditions are quite favourable.” And a result he is looking for “slightly better than average economic growth and wage gains.” Fellow FOMC 2017 voter Charles Evans stuck to his dovish leanings as he also called for a “gradual and cautious approach to hikes.” Evans also reiterated his view that he “needs to see clear signs of upward wage inflation before hiking rates,” while he believes that the Fed “should maintain accommodation until inflation on a sustainable path to 2%.” Evans did also posit that “inflation expectations are too low” when compared to the Fed’s 2% goal, and seemed cautious as he suggested that “recent inflation weakness may be more structural.” Evans went on to note that he deems that “the current setting of monetary policy is appropriate. Looking forwards, the voter noted that he is “open-minded about possible rate hike at one of next few meetings,” although he once again caveated this with the need for further inflationary pressure. Evans also revealed that he is in line with the median expectation in the dot plot as he expects “rates to rise to 2.7% by the end of 2019.”

In terms of other central bank rhetoric ECB president Draghi and governing council member Coeure where both keen to stress the need for caution regarding the exit from the current ultra-loose monetary policy settings.

The JPY and CHF outperformed on safe haven flow. The EUR took a hit on a combination of the German election uncertainty and cautious ECB rhetoric, although the single-currency experienced more of a slow grind lower than an outright heavy sell off. The NZD also edged lower in the wake of the country’s general election, while GBP, AUD and CAD all experienced more measured losses against the greenback.

US stocks started lower, and they took a fresh hit on North Korea’s Monday rhetoric and never really looked like recovering. The S&P 500 closed down 0.22% at 2,496.64, the NASDAQ 100 closed down 1.10% at 5,867.35, and the Dow closed down 0.24% at 22,296.31.

Treasury trade tracked risk sentiment, moving to fresh highs following the comments from North Korea’s foreign minister, and we consolidated around best levels for the remainder of the session. US Dec’17 10y T-note futures settled at 126.02, up 10+ ticks.

Crude oil markets rallied hard with rhetoric from OPEC pointing to the need for Libya and Nigeria to be formally included in the production arrangement, worries over the Kurdish referendum and technical breaks propelling futures higher. WTI crude futures settled at USD 52.22/bbl, up USD 1.56/bbl and Brent crude futures settled at USD 59.02/bbl, up USD 2.16/bbl.

25 Sep 2017 - 21:00- Fixed IncomeBank Speaker- Source: RANsquawk