Fed holds the line, despite more hawkish BoC & BoE - Westpac

Over the past month, markets have been relatively resilient despite considerable turbulence, especially in the US, which has been battered by Hurricanes Harvey and Irma, while at the same time having to deal with escalating geopolitical tensions around North Korea, and internal political battles, explains the research team at Westpac.

Key Quotes

“Despite that backdrop, equity markets have forged ahead, hitting new highs, commodity prices have also rallied further, buoyed by continued signs of global expansion and, while bonds did initially benefit from some safe haven buying that pushed UST 10yr yields back toward the 2% level, they have now corrected sufficiently to be largely unchanged on a year-on-year basis.”

“Over the past month, the communication from central banks has shifted slightly. The BoE and BoC have turned decidedly more hawkish, although the Fed and ECB have maintained their positions.”

“The September FOMC delivered the message that most market participants expected. That is, they did not shift the Fed Funds rate, but confirmed that October will see them begin the task of slowly unwinding a significant portion of their holdings of US treasuries and mortgage-backed securities. The Fed’s famous “dot plot” projections also suggested that a December rate hike is still central to their thinking, as is an extended tightening cycle beyond that.”

“While that was seen by some market participants as a hawkish stance, we are comfortable with the Fed maintaining consistency in its forecasting stance. Westpac expects that the Fed is set to further exceed market expectations. Indeed, we believe that, given current global uncertainties, that there is a real need for the FOMC to continue its gradual normalisation in pursuit of financial stability.”

“The Euro Area is in strong form, and growth is expected to persist. However, the pass-through of momentum in activity to wages and inflation is limited thanks to the significant structural slack that remains. The ECB will taper in 2018, but it will take its time announcing the details.”

“For China, the economic backdrop still appears sufficiently calm ahead of next month’s crucial National Congress meeting.”