Market wrap: US interest rates and the US dollar surged post FOMC - Westpac

Analysts at Westpac offered a market wrap.

Key Quotes:

"Global market sentiment: US interest rates and the US dollar surged in response to the FOMC statement which was not as dovish as expected. Importantly, the Fed continued to project another rate hike in December and affirmed its QE-unwind would start in October.

Interest rates: US 10yr yields rose from 2.22% to 2.29% (a six-week high), 2yr yields from 1.38% to 1.45% (the highest since Oct 2008). Fed fund futures yields rose, pricing the chance of a December rate hike at 66% (from 56%). Most of the gains came after the FOMC statement.

Currencies: The US dollar index is up 0.9% on the day. Underperformer EUR fell from 1.2020 to 1.1862 following the FOMC. USD/JPY rose from 111.25 to 112.52. AUD initially rose from 0.8020 to 0.8102 but plunged to 0.7992 after the FOMC. Outperformer NZD initially rose from 0.7305 to 0.7433, partly helped by a poll showing Nation regaining the lead, but plunged to 0.7316 following the FOMC. AUD/NZD extended its multi-week decline after the NZ poll, to 1.0891, and then ranged sideways around 1.0920.

Economic Wrap

The FOMC left rates unchanged in a 9-0 vote, as was widely expected, but continued to project a December rate hike via a dot plot showing 12 of 16 members expecting such. The projected rate hikes for 2018 were also left undisturbed, with 11 of 16 members expecting three hikes. The long run rate was lowered from 3.0% to 2.8%, though. Balance sheet reduction will start in October, as was previously signalled, with bonds maturing that month not replaced. Forecasts for core inflation and unemployment were only modestly tweaked, the former still expected to reach 2% by 2019.

Event Risk

NZ: Q2 GDP is expected to rise 0.8%, taking the yoy pace to 2.5% (which is what it was in Q1). NZ markets will also be watching an election poll tonight.

Australia: RBA Governor Lowe gives a speech titled “The Next Chapter” in Perth, 1:10 pm Sydney time.

Japan: The BoJ policy decision is expected to be on hold. While growth has picked up recently and the jobless rate is low, inflation is still well below target and we are yet to see a rise in full-time wages.

Euro Area: ECB President Draghi gives welcoming remarks at the annual European Systemic Risk Board conference. ECB Chief Economist Praet chairs a policy panel discussing “Low inflation: Lessons from the Past! Lessons for the future?”. Sep consumer confidence (advance) was last at -1.5, having maintained optimism through 2017."