No boost to 'reflation theme' from Fed

Market movers today

Today's calendar is fairly light with final euro area inflation figures and the weekly US jobless claims, hence focus will be on the European markets digesting the Fed decision yesterday evening (see section below).

Today we have the Bank of England meeting where we expect both rates and QE to be left unchanged. We will monitor any comments on the balance of risk and the latest sharpened rhetoric in the Brexit negotiations.

The 60 second overview

Fed - what it did. As a direct consequence of its August-shift to average inflation targeting (AIT) the Fed yesterday evening changed its forward guidance to 'it will be appropriate to maintain this target range until labour market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time'. It specified that it expects to 'maintain an accommodative stance of monetary policy until these outcomes are achieved'. Two members of the FOMC dissented: Robert Kaplan wanted to 'retain greater policy rate flexibility' (hawkish), while Neel Kashkari wanted to keep rates close to zero until inflation reached 2% 'on a sustained basis'.

The Fed also lifted its economic projections forecasting a 3.7% decline in GDP this year (previously -6.5%) and unemployment falling to 7.6% by year-end (previously 9.3%). At the press conference Powell indicated that these forecasts assume more fiscal stimulus from the US Congress. Interestingly, the board member's inflation projections did not show >2% PCE inflation overshoot before the end of the Fed's projection period. This was otherwise needed to fulfil its target of average 2% inflation.

Fed - what it did not do. The Fed did not touch its monetary policy tools. It left all policy rates unchanged and reiterated previous messages that it would continue its current asset buying 'at least at the current pace'.

Fed - our take. On one hand, the Federal Reserve was not as dovish as we had expected, but on the other hand not as hawkish as others had expected leaving the glass half empty/full. Basically, the message was 'keep calm and carry on', as the Federal Reserve will not hike rates until 2024 at the earliest. While Powell said the current QE pace is appropriate we think the Fed missed an opportunity to build its credibility of creating higher than 2% inflation as inflation markets already prior to the meeting doubted its efforts. Overall the lack of further easing is unfortunate, as economic research shows that monetary policy is more efficient if easing comes fast and forceful: the more you do now, the quicker you can also get out again. We no longer expect increasing QE buying pace unless we see an economic setback or a more significant risk off. Overall, we think the latest pause in the global reflation theme is set to extend.

Bank of Japan kept its QQE with yield curve control framework unchanged at a policy meeting ending this morning. Thus a -0.1% on the policy rate balances and a 0.0% target for the 10-year JGB-rate. The bank offered a slightly more upbeat view on the economy compared to March (no new projections, though), thus indicating no further stimulus is needed at the moment.

Equities. The big US indices all sold off post Fed, down more than 1%. This morning US equity futures continue sour trading, while the big Asian indices have followed suit. Inflation expectations are trading modestly lower and commodities including oil are trading heavy this morning.

FI. Long-dated US yields initially rose modestly on the back of the Fed's announcement that the policy rate will be on hold for at least the next three years. 10Y US treasury yields rose to 0.70%.

FX. For EUR/USD, the FOMC meeting was (given our expectation to a test of 1.20) somewhat of a lacklustre event. Rather, spot declined about 30 pips to 1.1799, which seems quite related to the concurrent decline in US equities. Overnight that move has extended. In our view, Powell's press conference will likely mean the USD-negative reflation story is set to pause a bit longer. Very muted initial reactions in both SEK and NOK crosses after the FOMC decision. EUR/SEK did slide a little and remains close to 10.40, thus still in a short-term ascending trend channel. For NOK specifically the fact that the Fed failed to deliver a boost to the reflation story leaves near-term prospects for a renewed NOK rally dim.

Credit. iTraxx Xover ended 21bp tighter at 292bp, while Main tightened half a basis point. However, around 19bp of the tightening in Xover was caused by the exclusion of Matalan and as such, actual tightening in Xover was closer to 2bp.

Nordic macro and markets

Norway. There are no market moving releases out of Norway today. We have now received all the important information ahead of next week's Norges Bank's meeting (24 September) where we think Olsen and co. will signal a slightly earlier rate hike than priced in markets.

Sweden. Riksbank buys SEK5bn 2024 and 2025 covered bonds.