Markets keep pace as Fed holds cash rate

Share Markets:

All eyes were on the Federal Reserve overnight. In the keenly watched decision, the Fed kept interest rates on hold instead of raising them.

However, the decision to delay raising rates only temporarily boosted equity markets. US shares spiked before losing ground later on.

The Dow closed 0.4% lower and the S&P500 fell 0.3%. 

The reaction probably reflected the signal that a rate increase was still likely to occur later this year or investors were spooked by lift in global growth concerns by the Fed.

Interest Rates:

US treasury yields fell sharply in reaction to the Federal Reserve decision to not raise interest rates. The US 10-year bond yield dropped 10 basis points to 2.19%.

Yields on 2-year bonds dropped 13 basis points to 0.68%. 

Markets are only anticipating just over a 20% chance of a hike in in October and a 40% chance of a hike in December, which suggests the fall in yields will be reversed if the Fed raises rates later this year. 

Foreign Exchange:

The US dollar index dropped following the Fed's decision to leave rates on hold.

The Australian dollar spiked to a high of 72.8 US cents as the US dollar weakened, but then erased those gains in step with the fall in risk appetite in equity markets and global growth concerns.

Commodities:

Commodity prices were mixed. Oil prices spiked, but then weakened later on weighed down by the concerns regarding global growth.

Gold prices rose as interest rates would be lower for longer, and as the US dollar weakened.

Australia:

No data to report.

Japan:

Japanese exports rose at an annual pace of 3.1% in August, down from 7.6% growth in July and below expectations for a 4.3% gain.

Imports were also weaker than expected, declining 3.1% in the year to August (vs expectations for a 2.5% decline). 

New Zealand:

GDP grew 0.4% in the June quarter, below expectations for 0.6% growth.

It followed just 0.2% growth in the March quarter. 

Annual growth stepped down from 2.7% to 2.4% in the June quarter, the weakest in 1½ years.

Momentum in the New Zealand economy has clearly weakened, weighed down by falling dairy prices. It will reinforce expectations that the RBNZ will cut official interest rates further.

United Kingdom: Retail spending grew 0.2% in August, in line with expectations, although back revisions saw the annual growth rate at 3.7%, slightly below estimates for 3.8% growth.

United States:

The Federal Open Market Committee (FOMC) left monetary policy settings unchanged.

While the Fed continued to see further improvement in the labour market, the inflation outlook and global conditions kept the Fed from acting.

It noted that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term".

There was one dissenter on the Committee, Lacker, who preferred to raise interest rates, and reflect the division of views around this decision.

In the projections, a large majority of Fed officials continue to expect the Fed will raise rates at least once by 25 basis points, and a handful still expect the Fed to raise rates by another 50 basis points.

Only 3 members expect policy tightening will be delayed till next year. With two meetings left this year in October and December, that suggests October remains a strong possibility as timing for the first rate hike.

Upcoming decisions however, will likely depend on how volatility in financial markets plays out.

For 2016, the median expectation for official interest rates was lowered to 1.375% from 1.625%, but indicates that the Federal Reserve continues to expect a moderate pace of tightening of around 1.00% next year.

In other data, housing starts fell 3.0% in August, but the number of starts remain elevated and close to the record high in the previous month.

A 3.5% lift in building permits suggests that there remains strength in the housing market. 

There was also another sign of improvement in the US labour market. Initial jobless claims declined from 275k to 264k for the week ending 12 September, the lowest in six weeks. 



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