US MARKET WRAP: FOMC unchanged, as expected; firms inflation view

FOMC: Rates unchanged as expected, firms language on inflation

In Janet Yellen’s final meeting as Fed chair, the FOMC maintained its fed funds target at 1.25%-1.50%, as expected. There were, however, more hawkish upgrades in the language of the central banks’ statement, dropping its reference to inflation remaining beneath 2% in the near-term, and sees price pressures moving higher this year. It also acknowledged market-based measures of inflation compensation have increased over the last few months, though they still remain “low”. Regarding growth and household spending, the FOMC now characterises both as “solid”, and sounded upbeat on the economy. In wake of the release, markets price c.90% chance of a March hike, with the probability of three rate rises in 2018 at c.67% vs 60% at the close of trade on Tuesday.

 

SPEAKERS: ECB’s Coeure notes FX volatility

ECB’s Coeure reiterated the ECB’s rate guidance, stating that there is currently no reason to believe that the distribution of upcoming inflation risks have moved permanently lower. He also argued that QE will not go on forever, though there is a broad agreement at the ECB for patience and prudence, adding that the ECB will not be too hasty. On the EUR, he noted that the ECB does not target FX rates, however, he acknowledged the recent volatility, and said that if that kind of volatility would lead to an unwarranted tightening of our monetary policy, the ECB would have to reassess and consider its position.

 

EQUITIES: SPX + 0.08% at 2825 , DJI +0.30% at 26154 , NDX +0.28% at 6950

Top sectors: Utilities +1.1%, IT +0.7% & Industrials + 0.4%

Bottom sectors: Healthcare -1.45%, Consumer Staples -0.4%, Consumer Discretionary -0.36%

Stocks began the cash session on the front foot, after an earnings beat from Boeing boosted the Dow. EA also gave upbeat guidance, sending its shares higher, and insurers were buoyed after Anthem’s firm earnings and guidance which also lifted other health insurers after they were hit by yesterday’s news that Amazon, JPMorgan and Berkshire Hathaway’s moves to lower healthcare costs. Stocks struggled to cling on to gains following the FOMC rate decision, where it saw inflation pressures building, keeping it on track to raise rates again in March.

 

TREASURIES: 10-Year T-Note futures settle 2 ticks lower at 121-18+

Treasury yields were mixed on Wednesday. The short-end of the curve saw yields rise towards session highs in wake of the FOMC’s signal that inflation pressures are seen firming, keeping it on course to continue its hiking trajectory. However, the long end of the curve found buyers, helping major curve spreads to continue flattening. 2s10s was c.1bps lower at settlement, 2s30s were c.4bps narrower, 5s30s c.4bps flatter.

In the US Treasury’s Quarterly Refunding announcement, the US Treasury raised the sizes of the 2- and 3-year note auctions by $2bln per month. As a result, the size of 2- and 3-year note auctions will increase by $6bln by the end of the quarter. In addition, Treasury will increase the auction size of the next 2-year FRN auction by $2bln in February. Finally, Treasury will increase auction sizes by $1bln to each of the next 5-, 7-, and 10-year notes and the 30-year bond auctions starting in February. In total, these adjustments will result in an additional $42 billion of new issuance for the upcoming quarter. The increased issuance was a little more aggressive than markets had anticipated.

 

FOREX: Dollar Index is flat heading into APAC trade

The DXY was lingering around the neutral mark on Wednesday, but continues to consolidate around the 89.20 level; the USD was supported after the FOMC upgraded its language on inflation, keeping the prospect of three hikes in 2018 alive (probability has risen slightly to around 67%), helping to pare back losses. The next major catalyst for the buck will be Friday’s payrolls data; the DXY did gradually strengthen after a solid ADP beat, however, attention will be on the AHE data in Friday’s NFP report.

The EUR eased after ECB’s Coeure highlighted FX volatility in an interview; while he said that the central bank does not target FX, he noted that any unwarranted tightening in monetary conditions may compel the ECB to “reassess.” Meanwhile, EZ inflation saw the core measure strengthen slightly, though the headline measure fell in January. Meanwhile, the 1.24 handle continues to act like a magnet.

GBP firmed vs the EUR and the USD, with traders noting month-end flows as being supportive. Sterling also shrugged-off news that EU officials reportedly have told UK banks that it would not allow a Brexit deal that would allow UK banks to operate in the EU without barriers. Nevertheless, GBP trades at around 1.42 against the USD and .8750 against the EUR; analysts still maintain that the pound is a sell on rallies, though that approach has been costly for traders as of late.

The dollar was mixed against havens. USDJPY is running into cloud resistance at 109.10, inspired by dovish comments from BOJ officials overnight; however, the Swiss franc and gold have advanced against the buck, with the latter trading near session highs at $1345.

The CAD strengthened against the dollar as GDP came in line with expectations. But the Aussie was still under pressure after headline CPI came in below expectations overnight.

 

CRUDE: WTI futures settle 23 cents higher at $64.73 per barrel; Brent futures settle 3 cents higher at $69.05 per barrel

Crude stocks built much more than expected in the week (the first build in 10 weeks), though stocks at Cushing drew down in line with expectations. Products, meanwhile, both drew down. Crude output, meanwhile, rose above 10mln barrels for the first time since 1970, the EIA said, while production levels rose by 0.4%. Markets were, apparently, supported by the product demand, and after knee-jerking lower, crude firmed.

A Reuters survey found that compliance with the OPEC/Non-OPEC deal to curb production was running at 138%, rising slightly vs December. Iraq and Venezuela are seen trimming the most production, however, overall OPEC output is seen rising by 100k BPD led by Nigeria.

Meanwhile, UBS initiated a short Brent position at $68.5 per barrel, it was reported, targeting $61.

US EIA Weekly Crude Stocks (w/e 26th Jan) 6.776M vs. Exp. 0.126M (Prev. -1.071M)

– Crude production rose 0.42% to 9.919mln bpd.

– Dist. Stocks (w/e 26th Jan) -1.940mln vs. Exp. -1.467mln (Prev. 0.639mln)

– Gasoline Stocks (w/e 26th Jan) -1.980mln vs. Exp. 1.809mln (Prev. 3.098mln)

– Cushing (w/e 26th Jan) -2.224mln (Prev. -3.150mln)

– Refining Util (w/e 26th Jan) -2.8% vs. Exp. -0.5% (Prev. -2.1%)

 

(RANsquawk)