• Fed kept rates and QE unchanged as expected but caught markets off guard with hawkish Fed dot plots
• Fed raised IOER to 15bps (prev. 10bps) and hiked RRP rate to 5bps from 0bps
• The DXY surged above 91.00, EUR/USD and GBP/USD lost 1.20 and 1.40 handles respectively
• Asian equity markets traded mostly lower with risk appetite subdued in reaction to the FOMC
• US President Biden warned Russian President Biden against carrying out additional cyber-attacks on US infrastructure
• Looking ahead, highlights include Norges Bank, SNB and CBRT rate decisions, Eurozone CPI (final), US IJC, ECB's Lane, Elderson, supply from Spain, France

FOMC

FOMC kept Fed Funds Rate unchanged at 0-25bps, raised IOER to 15bps (prev. 10bps) and hiked RRP rate to 5bps from 0bps, QE left unchanged at USD 120bln per month, with rate and QE guidance unchanged. Median dot sees lift off in 2023, with 7 dots see hike in 2022 (prev. 4) and 13 see it in 2023 (prev. 7). 13 out of 18 officials pencilled in a 2023 hike in the Fed Funds rate, with the median dot plot at 0.6% (which would indicate two 25bps hikes from the current stance), up from the prior no hikes forecasted. As expected, the 2021 inflation forecasts saw a chunky increase (median dot for 2021 Core PCE rose to 3.0% from 2.2%), although the 2022 forecast was revised higher by just a tenth to 2.1% and the 2023 forecast was unchanged, indicative of the Fed’s transitory inflation view. The FOMC upgraded its 2021 growth view to 7% from 6.5%, with 2022 and 2023 forecasts little changed. Elsewhere, there was no mention of tapering in the statement, as expected, while there were generally little changes anyway apart from the recognition of progress on vaccinations.

The Fed Chair gave no specific indicators/benchmarks for substantial further progress on its employment and inflation goals (aside from "full employment" and " inflation that averages 2%") but noted we are still “a ways off” reaching the goals and reiterated the Fed will provide advance notice before making changes to purchases; a familiar line from the Fed. He did however note this meeting was the “talking about talking about” meeting and that it will be appropriate to consider a tapering plan at the coming meetings as long as progress continues. Powell said tapering would be a committee decision and they would begin the process of assessing progress to "substantial further progress" at the July meeting. On the Fed’s dot plots, Powell stressed dots are not a great forecaster of future rate moves and caveated that rate lift off is not on the Committee's mind right now and it is something that will occur well in the future. On inflation, the Fed Chair reiterated bottleneck effects are putting upward pressure on inflation and this has had a larger effect than anticipated and he acknowledged inflation could turn out to be higher and more persistent than the Fed initially expected. Although, Powell stressed longer-term inflation expectations appear broadly consistent with the Fed's goal but if they were to move above target to a persistent level, albeit not their base case, the Fed would be prepared to adjust policy. Meanwhile, Powell stated there is a chance inflation could be quite low on the other side of this, stressing the Fed’s expectation of the current high inflation readings will start to abate. On the recent high take-up on the RRP, Powell said he is not concerned with the volumes and it is doing what it is supposed to do. Powell also said work is being done on some sort of solution to the Supplementary Leverage Ratio after the recent suspension of Treasury securities and reserves from the calculation in the capital regulation expired.

CORONAVIRUS UPDATE

Pfizer's (PFE) TOFACITINIB met the primary endpoint in a Brazilian study of patients hospitalised with COVID-19 pneumonia, according to data publish in NEJM. The trial demonstrated cumulative incidence of death or respiratory failure through Day 28 was at 18.1%, while death from any cause through Day 28 occurred in 2.8% of patients in TOFACITINIB group vs. 5.5% for those that were given a placebo. It also reported that serious adverse events occurred in 20 patients (14.1%) in TOFACITINIB group vs. 17 (12.0%) in placebo group. (Newswires)

CureVac (CVAC/5CV GY) said its COVID-19 vaccine demonstrated an interim vaccine efficacy of 47% against COVID-19 disease of any severity and did not achieve the prespecified statistical success criteria. (Newswires)

Novavax (NVAX) stated that raw material shortages are reportedly hampering local production. (Newswires)

UK may allow fully vaccinated people to travel to amber list countries without needing to quarantine. (Telegraph)

Japanese Economic Minister Nishimura said Japan will lift the state of emergency in Tokyo on June 20th with Tokyo and Osaka to move to focused restrictions, while he later announced the experts panel approved the government plan to lift the state of emergency in Tokyo and other prefectures. (Newswires)

ASIA

Asian equity markets traded mostly lower with risk appetite subdued in reaction to the FOMC where the Fed kept rates and QE unchanged as expected but caught markets off guard with hawkish Fed dot plots where median projections were for a rate lift off and total 50bps hike in 2023. ASX 200 (-0.3%) was led lower by the mining related sectors after underlying commodity prices succumbed to the pressure from a stronger USD and amid heavy losses in Whitehaven Coal after it downgraded its FY production again, but with downside in the index stemmed following blockbuster employment data and with financials underpinned by the rise in global yields. Nikkei 225 (-1.0%) underperformed in the aftermath of the FOMC amid a mixed currency and although Japan is reportedly set lo lift the state of emergency for nine prefectures, nearly all of them including Tokyo and Osaka will be subject to quasi-restrictions, while KOSPI (-0.4%) also weakened amid a pullback from record highs. Hang Seng (+0.1%) and Shanghai Comp. (+0.2%) were choppy amid lingering US-China tensions as Treasury Secretary Yellen reiterated the US is looking at a full range of tools to push back against China's practices that harm US national security but added that she would be worried about a complete technological decoupling from China. Participants also got to digest the latest activity data from China in which Industrial Production and Retail Sales missed expectations but still registered respectable growth of 8.8% and 12.4%, respectively. Finally, 10yr JGBs were lower on spillover selling from T-notes and with yields in the region boosted which saw gains of around 10bps in the Aussie 10yr and 13bps in its Kiwi counterpart, while focus for Japan turns to the BoJ which begins its 2-day policy meeting today.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.4298 vs exp. 6.4231 (prev. 6.4078)

US Treasury Secretary Yellen reiterated the US is looking at a full range of tools to push back against China's practices that harm US national security but added she would worry about a complete technological decoupling from China, while she also commented that the US would not agree to any kind of carve-out for China or other countries on the global minimum tax regime. (Newswires)

UK/EU

UK Chancellor Sunak said medium-term inflation expectations are quite well-anchored. Sunak also refused to confirm whether state pensions would rise as quickly as wages this year but did insist that the government policy was still for the so-called "triple lock". (GB News/Telegraph)

UK Trade Secretary Truss will begin trade discussions with New Zealand. (Telegraph)

British Chambers of Commerce's new chief called for the UK government to extend its COVID-19 support scheme and stated that a withdrawal of support is disappointing amid a delay to the lockdown exit. (FT)

Sources familiar with EU ban on banks from bond syndications said lenders were aware of this issue regards to bond sales and a number of banned banks have submitted information on remedial action and EU expects others to follow soon, according to sources. Furthermore, assessment of banks excluded from bond sales will be done very soon and sources expect some banned banks will receive the green light to soon re-join bond sales. (Newswires)

FX

In FX markets, the DXY surged to above the 91.00 level following the FOMC’s hawkish dot plot. This lifted the greenback to its highest in six weeks, whilst EUR/USD breached 1.2000 to the downside and with the latest rhetoric from ECB officials not doing much to alter the status quo, while GBP/USD struggled to hold on the 1.4000 handle with yesterday’s firmer than expected CPI data unable to support the pair. USD/JPY and JPY crosses were mixed with price action driven by their base currencies, and antipodeans also suffered against the greenback but then nursed some losses following a blockbuster jobs report from Australia where Employment Change topped forecasts to print 115.2k vs exp. 30.0k and the Unemployment Rate surprisingly fell to 5.1% vs prev. 5.5%, while New Zealand Q1 GDP was also better than expected with Y/Y growth at 2.4% vs. Exp. 0.9% which prompted ANZ Bank to bring forward its calls for an OCR hike to February next year.

BoC Governor Macklem said the economy is making good progress and that a complete recovery will take some time with the third wave of the virus a setback. Macklem also stated that following a sharp rebound in economic activity during fall and winter, there has been choppiness seen in growth again during Q2 2021, while he added that further adjustments to the QE program will be gradual and they will be deliberate in assessing incoming data and communicating their analysis. (Newswires)

Brazil Central Bank hiked the Selic rate by 75bps to 4.25% as expected. BCB removed the reference to partial normalisation process in the statement and sees another policy adjustment of the same magnitude at the next meeting. Furthermore, it stated deteriorating inflation expectations may require more forceful reduction of monetary stimulus and that the base case is for normalisation of policy towards the neutral rate, while it added that a rate hike at the next meeting will depend on how economic activity evolves, as well as balance of risks and inflation. (Newswires)

SNB said economic and financial conditions for the Swiss banking system have improved since the last financial stability report a year ago although pandemic continues to weigh on the economy, while it added that the banking system and economy have been resilient to date but noted the pandemic's adverse impact is turning out to be substantial. Furthermore, it said domestic GDP grows strongly in the near term and unemployment declines, while production remains underutilised for some time. (Newswires)

RBA Governor Lowe said it is premature to consider ending bond purchases and that bond buying has reduced funding costs across the economy, as well as contributed to lower AUD. Lowe reiterated that options include another AUD 100bln programme, scaling bank or spreading out bond buying, while he noted the Board has considered a range of possible scenarios for the three-year yield curve and in some scenarios conditions for a 2024 rate increase could be met, but in others not. Furthermore, he stated the economy is still in recovery stage with some way to go yet, that inflation pressures remain subdued which is likely to persist and that wage growth is subdued as firms focus on reducing costs. (Newswires)

• Australian Employment (May) 115.2k vs. Exp. 30.0k (Prev. -30.6k)
• Australian Full Time Employment (May) 97.5k (Prev. 33.8k)
• Australian Unemployment Rate (May) 5.1% vs. Exp. 5.5% (Prev. 5.5%)
• New Zealand GDP (Q1) Q/Q 1.6% vs. Exp. 0.5% (Prev. -1.0%)
• New Zealand GDP (Q1) Y/Y 2.4% vs. Exp. 0.9% (Prev. -0.9%, Rev. -0.8%)

COMMODITIES

Commodities weakened as the greenback strengthened post-FOMC which saw WTI crude futures decline beneath the USD 72.00/bbl after having earlier given up the initial gains following the EIA report, while recent comments from the Saudi Energy Minister failed to spur prices in which he noted that the oil market is not out of the woods yet. It was also reported that Norway labour unions agreed to a wage for oil drilling workers and therefore, averting strike action. Gold price slumped following the FOMC as the greenback strengthened, while copper prices also suffered with China's NDRC planning further rules concerning commodity prices.

Qatar set August loading Al-Shaheen crude term price at AUD 2.57/bbl higher than Dubai quotes which is the largest premium in 17 months, according to sources. (Newswires)

Norway's Industri Energi labour union said it has agreed a wage deal for oil drilling workers and SAFE labour union also agreed a wage deal for oil drilling workers. (Newswires)

NHC said Gulf of Mexico has a 90% chance of a tropical cyclone formation over the next 5 days with a tropical depression likely by late Thursday or Friday. (Newswires)

China NDRC said it achieved preliminary results in curbing surges of commodity prices and it will step up supervision on spot and futures market, as well as safeguard normal market order. Furthermore, the NDRC will work with other departments to release state reserves at an appropriate time to boost market supply, lower firms' cost pressure and guide prices to revert to a normal range, while it will issue new rules on price indexes for key commodities and services effective August 1st. (Newswires)

GEOPOLITICAL

US President Biden said the meeting with Russian President Putin was pretty straightforward and he told Putin they need to have some basic rules of the road that they can all abide by. Biden added that they discussed in detail the next steps on arms control measure and agreed to launch a bilateral stability dialogue on arms control, while he gave Putin a list of 16 critical infrastructure entities, and they also agreed to work on ensuring Iran does not get nuclear weapons. Biden also made it clear the US will respond to actions that impair its vital interests or those of its allies and that consequences would be devastating if Navalny dies. (Newswires)

Senior US administration official said the tone of discussions between US President Biden and Russia President Putin was very direct, constructive, non-polemical and very matter of fact. Furthermore, strategic stability initiative will look at additional practical measures in arms control and the US will look whether Russia will take action against those responsible for the colonial pipeline attack, while the meeting did not end early, it covered an extensive agenda. (Newswires)

Russian President Putin said he agreed with US's Biden on returning of Russian and US envoys strategic nuclear stability, while regional conflicts, trade and the Arctic were discussed. Putin noted there is nothing to discuss on possible Ukraine membership of NATO, that consultations will start on the level of foreign ministries and that they agreed to start consultations on cybersecurity. Furthermore, he stated there was no hostility at the meeting and talks were constructive in which both showed a desire to understand each other but added that it is hard to say if relations with the US will improve and that the US is to blame for all of the worsening in relations. (Newswires)

Kremlin stated that Russia President Putin and US President Biden adopted a joint declaration on strategic nuclear stability which stated that the two countries commit to dialogue to avoid risks, while the declaration on arms control said nuclear war should never be unleashed. Furthermore, it was separately reported that Russian President Putin said talks with US President Biden were "quite successful", according to Interfax citing sources, while another source report stated that talks were "intense" and that the pair discussed the full agenda. (Newswires/Interfax/Tass)

Austria is pushing back on some of the economic sanctions being worked on for Belarus, stating it is important the sanctions will not have an impact on the civilian population, according to an Austrian diplomat. (Politico)

US

The belly of the Treasury curve was offered hard as the Fed's Dot Plot began pricing in rate hikes for the first time post-COVID. 2s +3.4bps at 0.201%, 3s +6.0bps at 0.402%, 5s +9.3bps at 0.878%, 7s +8.9bps at 1.283%, 10s +6.3bps at 1.562%, 20s +1.3bps at 2.130%, 30s -0.1bps at 2.198%; TYU1 volumes surged in wake of the Fed announcement. 5yr TIPS +16.4bps at -1.550%, 10yr TIPS +11.7bps at -0.776%, 30yr TIPS +3.8bps at -0.114%. Eurodollar Z1 -1bp at 99.805, Z2 -6bps at 99.55, Z3 -15bps at 98.915, Z4 -16bps at 98.38, Z5 -12.5bps at 98.045. There was little reaction seen in wake of the US data today, with another disappointing housing report (May Housing Starts and Building Permits), but that was offset by the higher than expected Import and Export prices, particularly the latter (+2.2% vs exp. +0.8%). It wasn't till the FOMC announcement that the curve was brought to life. The rise in the 2023 median FFR dot plot to 0.6% from 0%, alongside more votes for a 2022 hike, saw the belly of the curve lead the rates sell-off in a knee-jerk reaction; STIRs were also pressured as the Fed made upward tweaks to its administered rates. As the dust settled, the long-end was little changed, although the belly sustained a big rise in yields as participants began to price in a more aggressive rate hiking cycle. What's more, the hints of liftoff saw real yields rise even harder than nominals, with inflation breakevens at the front-end falling significantly as the market removed some of the chunky inflation risk premia that has built up in the front-end of the breakeven curve over months since the Fed launched its flexible average inflation targeting framework. Looking ahead, the 5yr TIPS auction is on the horizon on Thursday, as is Initial Jobless Claims data, although price action will most likely be reflected in the context of today's heavy sell-off, adding to the well-noted short base built in the Treasury market. T-note (U1) futures settled 25 ticks lower at 131-24.

US President Biden stated he has not seen the infrastructure bill proposal, and he still hopes to put together the two book ends on an infrastructure deal. (Newswires)

US bipartisan group of around 20 Senators said they support an infrastructure investment framework without raising taxes and looks forward to developing legislation. (Newswires)