Fed stays on course - ING

According to analysts at ING, the Fed surprised on the hawkish side and while the announcement that the balance sheet run-off will start in October was well flagged, the unchanged median rate path for this and the next year implied by the dot plot caught markets by surprise.

Key Quotes

“The UST curve flattened with 2yr and 10yr yields some 4bp and 3bp higher, respectively, while 30yr yields were even a tad lower at the end of the day. The Fed still pencils in a hike in December, where markets now discount a probability of more than 60%, and three more in 2018. Markets still see less than two hikes in total by end 2018. Notably, the Fed median dots for 2019 and the longer run rate did shift lower.”

“In the session ahead of the Fed, 10yr Bunds had rallied towards 0.43% before ending the day at 0.44%. OATs and especially OLOs lagged with long end spreads versus Bunds widening by up to 2bp. The larger periphery saw a more pronounced widening of up to 5bp versus Bunds. Despite the Spanish government’s hard-line crackdown on Catalan referendum preparations, there was no clear underperformance of SPGBs.”

“Today’s focus could quickly turn to the ECB where a decision to calibrate QE is pending for the October meeting. Today ECB’s Smets, Chief Economist Praet and President Draghi will all make public appearances, the former two at the ECB’s “Understanding Inflation” conference, while the President will speak in his capacity of Chair of the ESRB.”

“EGB supply. Today Spain will tap the SPGBs 10/26, 10/28 and 10/44 for a combined volume of €4-5bn. SPGBs have mostly shrugged off any fall-out from the approaching Catalan independent vote, despite the hard-line stance of the central government. The resilience may also be attributed to the recent surprise rating upgrade of Portugal, which allegedly spurred hopes of Spain being upgraded by S&P (BBB+/Pos) next week, too.”

“France will launch a new 5yr OAT 3/23 today, as well as tap the OATs 2/20 and 11/24 for an overall volume of €6-7bn. In light of a looming QE taper, we think that OAT/Bund spreads looks rather rich with only minor concessions recently. Note that additionally the launch of a new 10yr benchmark looms next month. Today France will also tap the linkers OAT€i 3/21 OATi 3/28 and OAT€i 7/30 for a combined volume of €1.5-2bn.”