Market Review for September 21,2017

In the US, The U.S. Federal Reserve left interest rates unchanged on Wednesday but signaled it still expects one more increase by the end of the year despite a recent bout of low inflation.

The Fed, as expected, also said it would begin in October to reduce it’s approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017, or 0.25 percentage points above the current level.

 U.S. bond yields rose, pushing up the U.S. dollar after the Fed’s decision, but U.S. benchmark stock indexes were little changed.

U.S. benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since Aug, Move which helped push bank stock prices higher also.

In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it’s decision. It added that the near-term risks to the economic outlook remained “roughly balanced” but said it was “closely” watching inflation.

Fed Chair Janet Yellen said in a press conference after the end of the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.

“What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent,” she said. If they do, “it would require an alteration of monetary policy,” Yellen said.

While the interest rate outlook for next year remained largely unchanged in the Fed’s latest projections, with three rises envisioned in 2018, the U.S. central bank did slow the pace of anticipated monetary tightening expected thereafter.

It forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3.0 percent to 2.75 percent, reflecting concerns about overall economic vitality.

The U.S. Federal Reserve will resume rate hikes in December and raise borrowing costs three more times in 2018 and will also reduce the size of its asset stock pile by about $1.4 trillion over the next several years as it seeks to restore a normal environment for monetary policy, according to the poll of Wall Street’s top banks taken after the Fed’s latest policy meeting, which ended on Wednesday.

Moving to Japan, The Bank of Japan kept monetary policy steady on Thursday and maintained its upbeat view of the economy, signaling its conviction that a solid recovery will gradually accelerate inflation towards its 2 percent target without additional stimulus.

But new board member Goushi Kataoka dissented to the BOJ's decision to maintain its interest rate targets, saying current monetary policy was insufficient to push inflation up to 2 percent during fiscal 2019.

In a widely expected move, the BOJ maintained the 0.1 percent interest it charges on a portion of excess reserves that financial institutions park at the central bank.

At the two-day policy meeting that ended on Thursday, it also kept its yield target for 10-year Japanese government bonds around zero percent.

The decision was made by an eight-to-one vote.

The U.S. dollar shone while Asian shares slipped on Thursday after the U.S. Federal Reserve announced a plan to start shrinking its balance sheet and signaled one more rate hike later this year.

MSCI's broadest dollar-denominated index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.4 percent, shrugging off slight gains on Wall Street. Hong Kong's Hang Seng .HSI posted slim gains.

Japan's Nikkei .N225 gained 0.8 percent as a rise in U.S. bond yields lifted financial shares, while the yen's fall against the dollar after the Fed's decision helped exporters.

U.S. share prices recovered quickly from initial losses following the Fed's announcement, with the S&P 500 .SPX ending slightly higher, adding to a string of closing records.

The markets reacted to the Fed quite straightforwardly, with shorter yields rising more than long-dated bond yields. The bond markets have fairly strong conviction that low inflation and low growth will persist.

In the currency market, the rise in Treasury yields boosted the dollar's attractiveness. The euro EUR= dropped to $1.1879 from above $1.20 just before the Fed's policy announcement.

Likewise the dollar jumped to 112.595 yen JPY=, a two-month high, from around 111.30.

Gold XAU= last stood at $1,299.6 per ounce after falling to $1,296.1 on Wednesday, its lowest level in more than three weeks.

In commodities, Oil markets dipped on Thursday, weighed down by rising crude inventories and production in the United States as well as a stronger dollar, which potentially hampers fuel consumption in countries that use other currencies at home.

Brent crude futures LCOc1, the international benchmark for oil prices, were at $56.18 a barrel, as of 0531 GMT, down 11 cents, or 0.2 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $50.64 per barrel, down 5 cents.

Traders said a strengthening dollar .DXY weighed on Brent, while rising crude stocks and production in the United States pulled down WTI.

U.S. commercial crude oil inventories C-STK-T-EIA rose for a third straight week, building by 4.6 million barrels in the week ending Sept. 15 to 472.83 million barrels.

Meanwhile, U.S. oil production has largely recovered from the shutdowns following Hurricane Harvey, currently standing at 9.51 million barrels per day (bpd), up from 8.78 million bpd directly after the storm hit the U.S. Gulf Coast. C-OUT-T-EIA

 However, WTI did receive some support from a strong draw in gasoline stocks by 2.1 million barrels to 216.19 million barrels, traders said.

Markets could tighten should the Organization of the Petroleum Exporting Countries (OPEC) extend a production cut aimed at tightening supplies and propping up prices.

OPEC will meet in Vienna on Friday and discuss extending its deal to cut production with some non-OPEC producers that has been in place since January. The current deal will expire at the end of March 2018.

Under the deal, OPEC members and some non-OPEC countries pledged to cut production by 1.8 million bpd to tighten the market and prop up prices.

There are indicators that the supply cuts are having the desired effect.

View our full economic calendar for a daily roundup of major economic events.



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