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October it is! Fed head Yellen and her fellow FOMC policymakers seemed optimistic that the U.S. can weather the economic headwinds from the hurricanes, setting the date for the runoff and reviving rate hike expectations for December.

  • U.S. existing home sales down from 5.44M to 5.35M vs. 5.46M forecast
  • FOMC kept interest rates on hold at <1.25% as expected
  • Fed head Yellen confirmed that balance sheet unwinding will start in Oct
  • Yellen: Shortfall in inflation a mystery, does not reflect broad economic conditions
  • Yellen: Tight labor market to push wages and overall inflation higher
  • Yellen: Gradual rate hikes still appropriate, will consider reinvestment if outlook deteriorates significantly

Major Events/Reports

FOMC statement & presser

Trading conditions were tighter than Spanx ahead of the much-anticipated FOMC announcement, during which the Fed decided to keep interest rates on hold at <1.25% as expected. What took most market participants by surprise was that the tone was generally upbeat, even though policymakers acknowledged that Hurricanes Harvey and Irma likely put a dent on Q3 growth. The official statement indicated:

“Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

The U.S. central bank even upgraded its GDP forecast for this year from 2.2% back in their June statement to 2.4% while keeping the 2018 estimate at 2.1%. The Fed also kept its unemployment rate forecast steady at 4.3% this year and revised the next couple of years’ from their June 4.2% estimate to 4.1%.

Updated FOMC forecasts (September 2017)
Updated FOMC forecasts (September 2017)

As for inflation, the core PCE forecast was lowered from 1.7% to 1.5% for this year and from 2.0% to 1.9% in 2018. However, Yellen did clarify that while the shortfall in inflation this year has been a bit of a mystery, it does not reflect broad economic conditions.

Furthermore, Yellen pointed out that exports have picked up thanks to the strength of the global economy and that business investment has also increased as a result. She also assured that the impact of the hurricanes on payrolls should be temporary, along with the factors keeping a lid on price levels. Of course she also had a few cautious tidbits up her sleeve, citing that they would consider readjusting policy if things turn south once more.

With that, the committee also agreed to start unwinding the $4.5 trillion balance sheet next month, initially by reducing up to $10 billion each month in the amount of maturing securities it reinvests. This drove Treasury yields higher:

  • U.S. 10-year yield is up 1.81% to 2.284%
  • U.S. 5-year yield is up 2.91% to 1.889%
  • U.S. 2-year yield is up 3.53% to 1.451%

Equities initially dipped during the event but most were able to recover before the closing bell:

  • Dow 30 index is up 0.20% to 22,415.00
  • S&P 500 index is up 0.04% to 2,507.62
  • Nasdaq is down 0.08% to 6,456.04

Another thing worth noting is that Yellen admitted that she actually has never had a sit-down with U.S. President Trump since the start of his term, fueling speculations that the Donald probably might not keep her on board for much longer. But with the manner how she casually dropped the news, it seems like NBD for the head honcho either.

Major Market Mover(s):

USD

All eyes and ears were on the Fed, so it’s no surprise that the Greenback had the biggest reaction to the surprisingly positive mood of the central bank.

USD/JPY popped up to a high of 112.53 (+0.61%), USD/CHF broke out of consolidation to test the .9700 handle (+0.75%), EUR/USD tumbled to a low of 1.1862 (-0.84%), and GBP/USD slipped to 1.3484 (-0.13%)

EUR

The shared currency was the weakest of the bunch, though, carrying on with its slide from the earlier trading session.

EUR/NZD is down from 1.6391 to 1.6175 (-1.29%), EUR/AUD fell to a low of 1.4817 (-0.97%), EUR/GBP dropped to .8818 (-0.73%), and EUR/CAD is down to 1.4671 (-0.50%)

Watch Out For:

  • 11:45 pm GMT: New Zealand GDP q/q (How to trade this news report)
  • 11:45 pm GMT: New Zealand visitor arrivals m/m (-5.3% previous)
  • 4:00 am GMT: New Zealand credit card spending y/y (7.2% previous)
  • Tentative: BOJ decision and presser (Here’s what to expect)
  • 5:30 am GMT: Japanese all industries activity index (-0.1% expected, +0.4% previous)
  • 6:10 am GMT: RBA Governor Lowe’s testimony