FOMC Consistent with Jackson Hole

The FOMC upped its hawkish message on Wednesday, but the market reaction was mixed in with developments on Evergrande. There is an explanation in the final paragraph on why FX held and indices held up despite seemingly hawkish twist.  GBP is up after the BoE showed more optimism in its statement/minutes. The Canadian dollar is the top performer while the yen lagged on the day. Canadian retail sales fell by less than expected and US jobless claims edged up rose to 351K, a little more than expected. A new Premium FX trade was issued ahead of yesterday's FOMC statement. Below is some of our analysis on the Fed's new dot plot, Powell's presser and market reaction.   

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Wednesday's risk tone grew more positive after Evergrade said it would make an interest payment due this week. A report in AsiaMarkets also said that a bailout is coming. Finally, comments from the RBA's Debelle along with Powell hinted at a conversations with Chinese counterparts and a confidence that problems won't spread.

Understandably, some market participants may not have wanted to react to the China news until after the Fed. The FOMC statement itself was neutral but the 2022 dots moved to show a 9-9 even split on hiking in 2022. All but one dot (from 5) now show at least one hike in 2023 with the trajectory also moving higher.

In his press conference, Powell was surprisingly candid on a taper, saying he expects to support it so long as the September non-farm payrolls report is 'decent'. He also outlined that the taper would be completed around the middle of next year, so long as the economy matched Fed expectations.

All this was more hawkish than anticipated but dollar strength was mild. In bonds we saw the 'policy error' trade kick off again with the long end rallying, pushing down 30-year yields by 5 bps.

Stocks remained comfortable though and that may underscore the push and pull between the Fed and Evergrande.

Ashraf reminds us in this video from 4 weeks ago why the taper will not be poorly received by the markets, in 10:22 mins part of this video.