US Fed Unveils Unwind Strategy

Daily Analysis - 24/09/2017

FOMC Highlights Balance Sheet Tightening

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The US Federal Reserve reiterated its more hawkish stance during the latest FOMC decision, presenting plans to reduce the size of the balance sheet while underscoring the position that most committee members favor one more interest rate increase before the end of 2017.

Last Week


Expectations were high last week heading into the US Federal Reserve’s September decision, with the FOMC announcing the beginning of the balance sheet wind-down and the prospect of one more rate hike before year-end.  The Fed will commence balance sheet reduction in October at a rate of $10 billion per month with an additional $10 billion added once every three months until the total amount of balance sheet sales reaches $50 billion monthly.  Apart from policy, existing home sales tumbled -1.70%, extending the current contractionary trend for a third straight month as concerns about the housing outlook multiply.

Switching gears, the UK Pound crashed towards the end of the week before briefly recovering on the heels of a Moody’s sovereign credit downgrade to A2.  In addition, a speech from Theresa May indicating that she wants to set an official two-year transition with deadlines to jumpstart EU negotiations weighed on the currency. Across the English Channel, Eurozone annualized inflation climbed to a four-month high of 1.50% through the end of August, adding to tapering pressure facing the ECB. Canadian inflation also rose on a headline basis, climbing 1.40% year over year through the end of August.  Finally, in an unsurprising development, the Bank of Japan refrained from adjusting interest rates and easing after its latest monetary policy meeting.

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The Week Ahead


Readings on gross domestic product are set to top the list of important data arriving in the coming sessions which will be full of economic figures from across the globe.  The United States, United Kingdom, and Canada are set to report their respective GDP figures leading off with the UK which is projected to record 1.70% annualized growth through the end of the second quarter.  The comparable US figure is also expected to echo the second reading, with the final number forecast to stay on hold at 3.00%.  Canada will round out the GDP reports, with July growth expected to taper to 0.10%.

Aside from GDP, inflation will play a big role in the economic calendar, with the US reporting the Federal Reserve’s preferred PCE inflation gauge.  Japanese inflation is forecast to continue improving, with national core CPI anticipated to reach 0.70% during August as household spending accelerates. Euro Area headline CPI will also be revealed, with preliminary indications suggesting inflation will reach 1.60% through the twelve months ended in September.  Additionally, the US will be reporting on durable goods orders, new home sales, consumer confidence numbers.  Finally, to cap off the week, the Reserve Bank of New Zealand will issue its monetary policy decision, with no changes for interest rates predicted.

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