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US Dollar, Treasury Yields Surge Following Fed Announcement

The FOMC September meeting announcement was the central focus of financial markets today, as the Fed made the decision to hold its target range for the benchmark interest rate unchanged at 1%-1.25% and maintain its current outlook for an additional rate hike by year end.  The statement released afterwards cited solid job gains, a persistently low unemployment rate, increased household spending, and growth in business investment in support of their belief that “recovery is on a strong track.”  Looking past 2017, policy makers forecast the need for three more rate hikes next year, but only two in 2019 and one in 2020.  The disruptions of Hurricanes Harvey, Irma, and Maria were also noted in the text, acknowledging there would be a short-term impact on economic activity, however recovery would be expected over the medium term and would not affect future Fed policy decisions.  A word for word comparison of today’s FOMC statement vs. the text from July’s policy meeting can be found here.

 

 

Of more significant importance to investors, the Fed announced that the unwinding of its $4.5 trillion balance would commence in October, officially starting the balance sheet unwinding of the QE program started in the aftermath of the 2008 financial crisis.  The planned reduction in asset purchases will be “gradual and predictable” – $30 billion during Q4 of 2017, $380 billion in 2018, $460 billion in 2019, $375 billion in 2020, and $260 billion in the first three quarters of 2021.  Overall, the unwinding of the Fed balance sheet is perceived as a positive sign for banks, as a reduction to the bond-buying program should push long-term yields higher, creating a steeper yield curve and generally supporting higher rates, which would increase bank margins.
 
US Treasurys held within a tight range throughout the majority of the day before selling off sharply right after the Fed announcement.  Yields/swap rates are currently up 1-5 bps across the curve, with the 10-year note yield near 2.27%.  Major US stock indices fluctuated during the session, boosted by financial and energy shares while being weighed down by tech stocks.  The US dollar also surged following FOMC decision, gaining 0.5% against major currencies which was highlighted by a 0.9% rise against the euro.  In commodities, crude oil prices gained after a report showed a decline in US fuel supplies, with WTI rising 1.85% to $50.40/barrel – its highest mark in nearly four months.   

 

 

A report from the National Association of Realtors today reported a one-year low in existing home sales during August, as the persistently low supply of homes available in the market continues to drive prices higher and limit sales growth.  Sales of previously owned homes unexpectedly decreased 1.7% last month to a seasonally adjusted pace of 5.35 million.  Existing home sales were significantly weak in the Houston area, where purchases were down 25% YoY due in large part to Hurricane Harvey.  Additionally, the median house price in the US remained robust at $253,500, up 5.6% YoY, as declines in supply continue to boost home prices.  The inventory of available homes has now fallen for 27 consecutive months on a YoY basis, with August 2017’s inventory totaling 1.88 million.  The average time a home was on the market also held near historically low levels, coming in at 30 days during August.

 

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