• The FOMC doubled the QE tapering pace and now sees three rate hikes in 2022; Fed Chair Powell avoided hawkish curveballs
• Chair Powell said the Fed has not taken a position on whether it should pause between the end of the taper and first-rate hike
• Market sentiment saw a knee-jerk lower on the statement and SEP release before risk appetite intensified during the presser
• Asian equity markets traded mixed as the region digested the FOMC meeting; 10yr JGBs were indecisive
• Overnight, the DXY traded within a tight range, USD/JPY was kept afloat, and antipodeans marginally pulled back
• TRY again weakened as Turkish President Erdogan replaced two deputy finance ministers
• US Senate Majority Leader Schumer is likely to push back a vote on the Build Back Better plan until next year, according to sources
• Looking ahead, highlights include SNB, Norges, CBRT, BoE, ECB, Banxico, press conferences from the SNB, Norges and ECB, Flash PMIs, US IJC, ECB TLTRO Allotment, and the UK Conservative bi-election

FOMC

RELEASE: The FOMC maintained the Fed Funds Rate at 0.00%-0.25% and announced it is to double the pace of its asset purchase tapering to USD 30bln per month (consisting of USD 20bln Treasuries, USD 10bln MBS) which will be doubled again in January and with similar reductions likely to be appropriate each month thereafter - which puts it on course to conclude asset purchases by March, from the prior landing zone of around June, although this could be adjusted if warranted. The updated projections now see three rate hikes in 2022 (vs exp. two), revising up its view from one hike pencilled in at the September FOMC (recall that September, the Committee was essentially split on the potential need for a second 2022 rate hike) although in the longer-term, it has left its terminal rate view unchanged at 2.5%. Furthermore, inflation forecasts were revised up to 2.6% for headline PCE by the end of next year (prev. 2.2%), while the core measure is seen at 2.7% by end-2022 (prev. 2.3%). The Fed sees the jobless rate returning to the 3.5%-mark next year (prev. saw 3.8%), where it is likely to stay over its forecast horizon. As inflation has exceeded 2%, the Committee said it expects to maintain rates until labour market conditions have reached levels consistent with the Committee's assessments of maximum employment. Fed guidance was unchanged - it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.

• FOMC Statement and Summary of Economic Projections (SEP) can be found here.

PRESS CONFERENCE: Fed Chair Powell said economic developments and outlook warranted a quicker taper and noted that demand remains strong, and activity is on track to expand at a robust pace this year. He stated that Omicron poses risks to the outlook, but the Fed still sees rapid growth. Fed Chair Powell also stated that he does not expect to raise rates until the taper is complete, and it would not be appropriate to raise rates while the taper is ongoing. Furthermore, the Fed has not taken a position on whether it should pause between the end of the taper and first-rate hike, and noted that the balance of goals means it could raise rates before full employment has been met due to high inflation but added rapid progress is being made on inflation and they may have to invoke the need to raise rates before that test is met. Fed Chair Powell also stated that labour force participation has been subdued which is disappointing and it was now likely that higher participation will take longer, while he stated that if the economy turns out not to be as strong, they will adapt policy accordingly and if it were to slow, that will slow rate increases.

REACTION: Analysts have framed the overall event as balanced – with both hawkish and dovish elements and no major curveballs. The three hikes for 2022 in the SEPs was somewhat more hawkish than expected, although this was a risk many were looking out for. The Fed also decided to double the pace of its asset purchases, seeing the taper process conclude in March, rather than in June as initially projected, but all as expected. Market sentiment saw a knee-jerk lower on the statement and SEP release before risk appetite intensified during the presser, with the statement also perhaps not being as hawkish as some had feared while inflation still is expected to cool down whilst the job market is expected to continue to improve. Some also noted that Powell sounded less hawkish than some had anticipated when he said labour force participation had been disappointing and suggested that if the economy turned out not as strong, they will adapt policy accordingly in which a slowdown would slow rate increases. The long-term neutral rate was also left unchanged while the hikes over the forecast horizon had only risen by one - from seven to eight. The Fed was one of the main risks heading into year-end (with BoE and ECB today), and with the Fed out the way, it may pave the way for a 'Santa Rally', analysts have said, while there was also perhaps an unwind of positioning after the downside in stocks seen earlier in the week. Equities saw a brief move lower on the release, but this was quickly pared with the S&P 500 closing higher by 1.6% and the Nasdaq the outperformer. A similar tone was seen in the Dollar and Treasuries. The initial Dollar bid on the statement completely unwound and the Buck was sold post-presser while the Treasury curve finished the session steeper, with 5s30s unwinding the post-statement flattening. Crude enjoyed the risk rally and Dollar selling.

CORONAVIRUS UPDATE

NIH's Fauci said NIAID data shows neutralising activity of two doses of the Moderna (MRNA) vaccine against Omicron variant is 'substantially low' and that there is currently no need for a variant-specific booster shot, while he added NIAID data shows a booster dose of Moderna vaccine puts neutralising activity 'well within the range of neutralising Omicron'. (Newswires)

US CDC advisers are to weigh limits for the Johnson & Johnson (JNJ) COVID-19 vaccine sue to continued blood clot issues. (Washington Post)

UK PM Johnson said the wave of Omicron continues to roll in and that the doubling rate in some regions is now down to less than two days, while he added there is now evidence of the ‘inevitable’ increase in hospitalisations. PM Johnson also stated that they have boosted over 45% of adults in England and more than 650k booster jabs were delivered on Tuesday. Furthermore, he said the approach of Plan B restrictions and accelerating boosters is still the right ‘mixed approach’ to help control the surge, rather than more restrictions now.(Newswires/BBC)

French Government reportedly intends to introduce mandatory PCR tests for travellers from Britain due to the COVID risk, although it was later noted that the French Government said PCR test requirement for UK is an option but it has not yet been decided, according to a source. (Newswires/BFM TV)

South Africa reported a new record of daily COVID cases at 26,976. (Newswires)

ASIA

Asian equity markets traded mixed as the region digested the FOMC meeting. The ASX 200 (-0.4%) was negative with heavy losses in the healthcare sector and as COVID infections remained rampant. There were also notable comments from RBA Governor Lowe that the board discussed tapering bond purchases in February and ending it in May or could even end purchases in February if economic progress is better than expected, although it is also open to reviewing bond buying again in May if the data disappoints. The Nikkei 225 (+1.9%) outperformed and reclaimed the 29k level after the Lower House recently passed the record extra budget stimulus and with the latest trade data showing double-digit percentage surges in Imports and Exports, despite the latter slightly missing on expectations. The Hang Seng (-0.5%) and Shanghai Comp. (+0.3%) were varied with Hong Kong pressured by losses in the big tech names amid ongoing frictions between the world’s two largest economies and as US lawmakers proposed a bill to allow the US oversight of China audits, although the mainland was kept afloat amid further speculation of a potential LPR cut this month, as well as reports that China will boost financial support for small businesses and offer more longer-term loans to manufacturers. Finally, 10yr JGBs were indecisive despite the constructive mood in Tokyo and with price action stuck near the 152.00 focal point, while demand was also sidelined amid mixed results at the 20yr JGB auction and as the BoJ kickstarts its two-day meeting.

• 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 6.3637 vs exp. 6.3625 (prev. 6.3716)

China government is reportedly increasing its practice of taking minority stakes in private companies that possess large amounts of key data, according to sources. (Newswires)

• Japanese Trade Balance Total Yen (Nov) -954.8B vs. Exp. -675.0B (Prev. -67.4B, Rev. -68.5B)
• Japanese Exports YY (Nov) 20.5% vs. Exp. 21.2% (Prev. 9.4%)
• Japanese Imports YY (Nov) 43.8% vs. Exp. 40.0% (Prev. 26.7%)
• Australian Employment (Nov) 366.1k vs. Exp. 205.0k (Prev. -46.3k)
• Australian Unemployment Rate (Nov) 4.6% vs. Exp. 5.0% (Prev. 5.2%)
• Australian Participation Rate (Nov) 66.1% vs. Exp. 65.5% (Prev. 64.7%)
• New Zealand GDP QQ (Q3) -3.7% vs. Exp. -4.5% (Prev. 2.8%, Rev. 2.4%)
• New Zealand GDP YY (Q3) -0.3% vs. Exp. -1.6% (Prev. 17.4%, Rev. 17.9%)

FX

In FX, the DXY ultimately weakened as Fed Chair Powell refrained from providing any curveballs and was less hawkish than some had anticipated when he noted that labour force participation had been disappointing and suggested that if the economy turned out not as strong, they will adapt policy accordingly in which a slowdown would slow rate increases. EUR/USD benefitted in the aftermath of the FOMC but with price action capped by resistance at the 1.1300 level and ahead of today’s ECB meeting, while GBP/USD was also rangebound before the BoE policy announcement after fading some of the FOMC-induced gains and nearly all of the support from the firmer than expected UK CPI data. USD/JPY and JPY-crosses were kept afloat amid the outperformance in Japanese stocks although antipodeans marginally pulled back overnight despite the blockbuster jobs data from Australia and narrower than expected contraction in New Zealand's Q3 GDP. In EM, the TRY weakened to a fresh record low beyond 15.000 against the greenback ahead of the CBRT meeting and after reports that President Erdogan replaced two deputy finance ministers.

RBA Governor Lowe said he expects conditions for a rate hike will not be met next year and that they are "still a fair way" from a hike with the board prepared to be patient. Lowe stated that the board discussed tapering bond purchases in February and ending in May, while they could end buying in February if economic progress is better than expected but added that they could also review bond buying again in May if the data disappoints and the QE outlook depends on inflation data, labour market and strength of consumer confidence. Furthermore, Lowe said they will consider actions of other central banks and effects of Omicron and that if the rest of the world tightens and RBA doesn't, it would lead to lower AUD, while he added that if other central banks tighten, it would raise probability of them following but also noted that they are in no hurry to raise rates. (Newswires)

Turkish President Erdogan replaced two deputy finance ministers, while it was separately reported that Turkey extended tax discounts on certain TRY-denominated assets. (Newswires)

COMMODITIES

Commodities benefitted as the greenback softened and risk appetite was fuelled in the aftermath of the FOMC. WTI crude futures regain a firm footing above the USD 71/bbl level. Elsewhere, gold initially wobbled in reaction to the FOMC's faster taper announcement and triple hike projection for next year, but clawed back losses and then some as the dust settled and as the greenback weakened during the press conference where Fed Chair Powell, while copper was also kept afloat and held on to the spoils from the heightened risk tone in US.

Qatar Energy was reported to sell February Al-Shaheen crude at the lowest premiums in three months, according to sources. (Newswires)

GEOPOLITICAL

US Senate passage of the Uyghur bill targeting China was reportedly held up due to child tax credit disagreement. (Newswires)

Syrian state media confirmed that air defences responded to an Israeli missile attack and noted that one soldier was killed. (Newswires)

US

The Treasury curve bear steepened with initial flattening post Fed-statement/SEP's completely unwound as Fed Chair Powell avoids hawkish curveballs. Post-Powell, 2s +0.8bps at 0.667%, 3s +0.0bps at 0.976%, 5s +0.8bps at 1.242%, 7s +1.4bps at 1.405%, 10s +2.1bps at 1.460%, 20s +4.0bps at 1.902%, 30s +4.2bps at 1.861%. 5yr TIPS +13.3bps at -1.466%, 10yr TIPS +2.9bps at -0.972%, 30yr TIPS +0.9bps at -0.372%, 5yr BEI +2.3bps at 2.720%, 10yr BEI +1.9bps at 2.409%, 30yr BEI +2.7bps at 2.253%. Pre-Fed saw rather contained trade although a morning 30k block sale in the 5yr added pressure to the curve in anticipation of a hawkish Fed decision. The double of tapering and SEP's was more or less as expected although three hikes are now seen in 2022 for the median dot (estimate was for two, but the risk was there for three). Market pricing saw a hawkish tilt in line with the new dot plots with Fed funds futures pricing in a 90% chance of a hike in April with a 50% chance in March, with the first hike fully priced in by May. A knee jerk lower in treasuries and flattening of 5s30s was the initial reaction to the statement but this had unwound as Powell started speaking. Heading into the closing bell the curve was bear steepening with the short end of the curve lower than pre-Fed levels while the longer end bonds were also off lows, but not to the same extent, seeing 5s30s steeper on the session and completely unwinding the initial statement flattening with no hawkish curveballs thrown in by Powell. T-note futures (H2) settled 5+ ticks lower at 130-15.

Talks between Senator Manchin and President Biden are not going well on Build Back Better, according to a source familiar with the talks. Furthermore, the Child Tax Credit is said to be a huge sticking point as Manchin wants it cut and to “zero it out”, while the source stated that Biden and Manchin are very far apart, according via CNN's Raju. However, there were later comments from Manchin that he is not opposed to Child Tax Credit but was reportedly overheard on the Senate floor saying that he was a no on motion to proceed to Build Back Better, according to Punchbowl citing sources. (Newswires/CNN/Punchbowl/Twitter)

US Senate Majority Leader Schumer is likely to push back a vote on the Build Back Better plan until next year, according to NBC citing sources familiar with the matter. (Newswires)