European Morning Briefing: Fed Hints at Another Rate Rise
Stocks to gain; EUR/USD 1.1886-89; bund yield 0.444%; Brent crude $56.15; gold $1299.50
-Fed to Start Paring Holdings, Keeps December Rate Rise on the Table
-Bank of Japan Sticks With Easy-Money Policy Settings
-EU's Mogherini Says All Parties Agree Iran Fulfilling Nuclear Deal Commitments
-Fiat Chrysler Recalls Nearly 50,000 Minivans for Seat-Belt Defect
-Piraeus Bank: No Material Impact from BoG Report
-BP Says Power Restored at Gulf Platform
Watch For: Eurozone FCCI consumer confidence indicator; U.K. public sector finances; Norway interest rate decision; no major earnings scheduled
The Federal Reserve said Wednesday it would initiate in October its long-telegraphed plan to shrink the portfolio of bonds acquired after the 2008 crisis and left open the possibility of raising short-term interest rates by December.
The Fed left rates unchanged Wednesday, but the central bank penciled in one more rate rise in 2017, even though persistently low inflation has given some officials second thoughts about a move this year. The vote was unanimous.
"We believe the recovery is on a strong track," Fed Chairwoman Janet Yellen said, explaining why officials expect to keep raising rates gradually in coming years.
"The basic message here is U.S. economic performance has been good," Ms. Yellen said. "The American people should feel the steps we have taken to normalize monetary policy...are well justified given the very substantial progress we've seen in the economy."
The bigger question this week centered on how the Fed would frame the debate over raising rates in December and beyond. Fed officials' newest economic projections indicated officials still largely expect to raise rates one more time this year.
But they showed slightly less urgency about the level of rates over the long run, and more officials now see the Fed undershooting its 2% inflation target for longer than they did in June, the last time they released economic projections.
Some 12 of 16 officials said they expected the Fed would need to raise rates at least one more time before year-end, the same as in June. Policy makers continued to expect three more rate increases next year, two more in 2019 and one in 2020.
The Bank of Japan left policy unchanged Thursday, sticking with its aggressive monetary stimulus measures as many other major central banks around the world head toward the exit door from easy money.
The BOJ's policy-setting board voted eight to one to keep its target for 10-year Japanese government bond yields at around zero and its short-term deposit rate at minus 0.1%.
Iran and major world powers are all fulfilling their commitments under a pact to prevent Tehran from acquiring nuclear weapons, the European Union's foreign policy chief Federica Mogherini said Wednesday.
The confirmation followed a regular meeting of a joint commission charged with reviewing the 2015 agreement, and comes as the U.S. levels additional demands to remain in the deal. President Donald Trump said he decided on the U.S. approach earlier Monday, without providing details.
European stocks are poised for opening gains Thursday, with DAX futures up 63 points and FTSE 100 futures 6 points higher.
Asian stocks were split early on whether to rise or fall in the wake of the Fed's statements on policy and economic projections.
Japan was again a standout, with equities building on this week's two-year highs as the yen continued to retreat. Meanwhile, Australia underperformed as metal prices fell and utilities stocks slid.
The Nikkei was recently up 0.7%, putting it just 2% away from hitting levels last seen in 1996. In Australia, the S&P/ASX 200 was recently down 0.7%; some mining companies fell more than 1% as a stronger dollar depressed metal prices. China and Korea logged small early declines while Taiwan and Hong Kong rose slightly.
The Dow and the S&P 500 hit new highs Wednesday even after the Fed signaled the end of quantitive easing. The S&P 500 advanced 0.1%, while the Dow Jones Industrial Average rose 0.2%. The Nasdaq Composite fell dipped 0.1%.
Fiat Chrysler issued a recall on Wednesday to fix defective seat belts in about 50,000 Chrysler Pacifica vehicles, or about one-third of total production volume since sales of the auto maker's new minivan began last year.
The flaw affects 47,927 minivans from the 2017 and 2018 model years sold in the U.S. and another 1,908 sold in Canada, the company said.
Greece's Piraeus Bank said it does not expect any material financial or capital impact to arise from the supervisory inspection conducted by the Bank of Greece in relation to legacy issues of adherence to the supervisory framework and internal policies.
Piraeus Bank shares tumbled 21%, after reports on local media that a central bank investigation found that several bank officials have violated bank regulations from 2014 to 2016. According to Greek officials, Bank of Greece's audit has been sent to a Supreme Court prosecutor.
The dollar extended gains in Asia after jumping Wednesday after the Fed announcement.
The WSJ Dollar Index rose 0.2% to 85.80, having risen during the U.S. session. The index had been down as much as 0.4% before the Fed announcement. The ICE U.S. Dollar index shot to the highest level since early September.
The Fed's projections for future rate increases, known as the "dot plot," showed policy makers continue to expect three more rate increases next year.
"This clears the bar for a hawkish surprise," said Vassili Serebriakov, a currency strategist at Crédit Agricole. "Markets expected the dot plot to be more dovish."
Markets are now pricing in a 73% chance that the Fed raises rates again this year, up from 49% a week ago, according to CME Group data.
Hedge funds and other speculative investors held a net $12.5 billion in bets against the dollar last week, near the highest level since early 2013, according to Commodity Futures Trading Commission data.
"The rate at which the dollar had fallen over the last quarter has been quite big," said Ron Waliczek, a managing director in foreign exchange and interest rates at INTL FCStone Markets. "There's going to be further dollar buying as the investment community starts looking at the Fed."
At 0350 GMT, USD/JPY was 112.41-42, EUR/USD was 1.1886-89 and GBP/USD was 1.3492-94.
U.S. government bond prices fell for an eighth consecutive session Wednesday after the Fed statement.
The yield on the benchmark 10-year U.S. Treasury note settled at 2.276%, its highest close since Aug. 8, up from 2.239% Tuesday.
Meanwhile, the yield on the two-year U.S. Treasury note, which tends to be more sensitive to market expectations for Fed policy, rose to its highest level since November 2008, settling at 1.442%, compared with 1.401% on Tuesday.
Disappointment that the central bank "gave only passing mention to inflation" while continuing to leave near-term rate projections in place likely accounted for selling in the bond market, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
Fears that the Fed will continue to raise rates despite lackluster inflation could keep pressure on the bond market in the near term, analysts say, although others believe the Fed is unlikely to move aggressively in normalizing monetary policy.
The central bank said Wednesday that it reduced its longer-term projection for its federal-funds rate. Fed officials now see a rate target of 2.8%, rather than 3%. The move, analysts say, suggests the Fed will proceed cautiously.
"It's going to be a slow, slow climb," said Chris Gaffney, president of EverBank World Markets, adding that he sees the central bank moving slowly to prevent a market shock.
Oil futures were mixed in early Asian trade, but close to maintaining the near-2% gain seen in New York that put both WTI and Brent at fresh multimonth highs.
Prices extended gains in New York Wednesday even after the release of weekly U.S. inventory data that showed a larger-than-expected build in crude inventories in the latest report. The U.S. Energy Information Administration reported the amount of crude oil in storage increased by 4.6 million barrels last week, exceeding analyst expectations for a build of 2.6 million barrels.
"I think the market to a large extent is still suspect of the data," said Kyle Cooper, a consultant at Ion Energy Group.
But recent optimism can be unwound quickly depending on what does--and doesn't--come out of Friday's meeting involving OPEC and non-OPEC members about their production-cap agreement.
At 0158 GMT, November Nymex WTI was up 5 cents at $50.74/barrel while Brent was down 14 cents at $56.15.
Gold prices maintained their post-FOMC declines in Asia, trading around 3-week lows.
The indication of another rate increase by the Fed this year sent London spot prices down 1% Wednesday and gold is expected to remain under pressure in the near term. Still, President Trump's tough stance on North Korea and Iran will likely limit the downside. At 0236 GMT, gold was down 0.1% at $1,299.50/troy ounce.
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