• The Fed kept rates unchanged and removed the reference to possible additional rate hikes but also downplayed near-term cuts.
• APAC stocks were mixed after the losses on Wall St owing to banking sector fears and Fed Chair Powell's pushback against a March rate cut.
• Chinese Caixin Manufacturing PMI data topped forecasts, China's Finance Ministry said it will implement structural tax cuts in 2024.
• European equity futures indicate a steady open with Euro Stoxx 50 future -0.1% after the cash market closed down 0.3% on Wednesday.
• DXY is back above 103.50 after rebounding post-FOMC, EUR/USD hovers around 1.08 and AUD lags across the majors.
• Looking ahead, highlights include EZ & Italian CPI, US IJC, Riksbank & BoE Policy Announcements, Comments from ECB’s Lagarde & Lane, BoC's Macklem & Rogers, BoE's Bailey post-announcement press conference, Supply from Spain & France, Earnings from Julius Baer, Roche, Sanofi, BNP Paribas, Shell, Deutsche Bank, Apple, Merck, Amazon & Meta.

US TRADE

EQUITIES

• US stocks were sold throughout the session with underperformance in the Nasdaq after Microsoft and Google's earnings, while a dismal NYCB report ignited some fears on the regional banking sector and saw the stock, KRE, and the Russell 2000 index tumble. Attention then turned to the FOMC where the Fed kept rates unchanged and removed the reference to possible additional rate hikes but also downplayed near-term cuts.
• SPX -1.61% at 4,845, NDX -1.94% at 17,137, DJIA -0.82% at 38,150, RUT -2.45% at 1,947.
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FOMC

• Fed kept rates unchanged as expected at 5.25-5.50% and removed its reference to possible additional rate hikes but does not expect it will be appropriate to cut rates until there is greater confidence inflation is moving sustainably towards 2%. Fed said recent indicators suggest that economic activity has been expanding at a solid pace (prev. slowed from a strong pace in Q3) and the Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. Fed removed the line that "tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation", while it stated in considering any adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and balance of risks.
• Fed Chair Powell said the economy has made good progress and inflation has eased but added the path forward is uncertain and they are fully committed to returning inflation to 2%. Powell also said the policy rate is well into restrictive territory and they have been seeing effects of economic activity and inflation, while he noted the policy rate is likely at its peak for this tightening cycle and it will likely be appropriate to begin reducing rates sometime this year if the economy evolves as expected.
• Fed Chair Powell said during the Q&A that almost everyone on the committee believes it will be appropriate to reduce rates and in theory, real rates go up as inflation goes down but can't mechanically adjust policy and does not know where the neutral rate of interest is. Powell also said they are not looking for a slide in employment, but the Fed would cut rates if they saw a weakening and in the base case where the economy is healthy with a strong labour market, the Fed can be careful as they think about the rate cut timing. Furthermore, he does not think a March rate cut is likely with a March rate cut not the base case and said it is to be seen but does not think the Fed will have enough confidence by March, while they will be data dependent taking decisions meeting by meeting and said the balance sheet run-off so far has gone very well with Fed is getting to the point where questions on the pace of the runoff are coming into focus and will have an in-depth discussion on the balance sheet at the March meeting.

NOTABLE HEADLINES

• US House voted 357-70 to pass a bill to expand the child tax credit and restore full business deductions for research and equipment investments.

APAC TRADE

EQUITIES

• APAC stocks were mixed after the losses on Wall St owing to banking sector fears and Fed Chair Powell's pushback against a March rate cut, while Chinese Caixin Manufacturing PMI data topped forecasts.
• ASX 200 pulled back from record highs amid weakness in tech and financials, as well as softer data.
• Nikkei 225 retreated amid recent currency strength and with a slew of earnings influencing price action.
• Hang Seng and Shanghai Comp were mixed with early upside from stronger-than-expected Caixin PMI data and further support pledges although the gains were limited after the substantial PBoC liquidity drain and the mainland index gradually reversed course.
• US equity futures (ES +0.2%) nursed some of their post-FOMC losses as participants braced for the big tech earnings.
• European equity futures indicate a steady open with Euro Stoxx 50 future -0.1% after the cash market closed down 0.3% on Wednesday.

FX

• DXY was rangebound around the 103.50 level after rebounding in the aftermath of the FOMC meeting where the Fed kept rates unchanged and although it removed the reference to possible additional rate hikes, it also downplayed near-term rate cuts.
• EUR/USD struggled for direction after a recent brief dip beneath 1.0800 and with a slew of Eurozone CPI and PMIs due later.
• GBP/USD stalled on an approach towards the 1.2700 level, while the focus now turns to the BoE meeting.
• USD/JPY languished beneath the 147.00 handle amid the recent risk aversion and narrowing of yield differentials.
• Antipodeans were indecisive with AUD/USD also hampered by a surprise slump in Australian Building Approvals.
• PBoC set USD/CNY mid-point at 7.1049 vs exp. 7.1802 (prev. 7.1039).
• Brazil Central Bank cut the Selic rate by 50bps to 11.25%, as expected, while committee members unanimously anticipate further reductions of the same magnitude in the next meetings. BCB said this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process and the total magnitude of the easing cycle throughout time will depend on inflation dynamics, expectations and projections, the output gap and balance of risks.

FIXED INCOME

• 10-year UST futures eased off yesterday's highs but held on to most of the recent spoils after having bull-steepened on soft US data and banking fears, despite Fed Chair Powell's pushback against a March rate cut.
• Bund futures gave back some of their recent gains after climbing on the back of softer German inflation data.
• 10-year JGB futures were eventually lifted in the aftermath of the 10yr JGB auction which attracted a larger amount of bids, while reports that the BoJ's JGB purchases in January were at the lowest since June last year had little effect on prices.

COMMODITIES

• Crude futures nursed some of the prior day's losses after suffering from the risk-off sentiment and a surprise crude build.
• US crude oil production rose 84k BPD in November to 13.308mln BPD (prev. 13.224mln BPD in October), according to the EIA.
• Spot gold eked mild gains but with upside capped beneath USD 2050/oz after yesterday's fluctuations.
• Copper futures remained subdued following the recent soft US data and reaction to the Fed.

CRYPTO

• Bitcoin was pressured amid the mixed risk appetite which saw prices test USD 42,000 to the downside.

NOTABLE ASIA-PAC HEADLINES

• Chinese President Xi urged efforts to accelerate the development of new productive forces and firmly promote high-quality development, while they must strengthen scientific and technological innovation.
• China's Finance Ministry said it will implement structural tax cuts in 2024 and support tech innovation and the manufacturing sector. China's Vice Finance Minister said 2023 tax and fee cuts and rebates totalled CNY 2.2tln, while fiscal policy will help expand domestic demand and they will appropriately increase investment under the central government budget.
• HKMA maintained its base rate unchanged at 5.75%, as expected.

DATA RECAP

• Chinese Caixin Manufacturing PMI Final (Jan) 50.8 vs. Exp. 50.6 (Prev. 50.8)
• South Korean Trade Balance (USD)(Jan P) 0.3B vs. Exp. 0.8B (Prev. 4.46B)
• South Korean Exports YY (Jan P) 18.0% vs. Exp. 17.8% (Prev. 5.0%)
• South Korean Imports YY (Jan P) -7.8% vs. Exp. -7.6% (Prev. -10.8%)
• Australian Building Approvals (Dec) -9.5% vs. Exp. 1.1% (Prev. 1.6%, Rev. 0.3%)

GEOPOLITICS

• US fighter jets targeted 10 unmanned Houthi drones and a ground control centre in western Yemen, while it was also reported that US Central Command said a Houthi anti-ship ballistic missile and Iranian UAVs were shot down in the Gulf of Aden.
• White House said National Security Adviser Sullivan and UK Defence Secretary Shapps discussed preventing escalation in the Middle East and ongoing efforts to defend against Houthi attacks, while they reaffirmed support for Ukraine, according to Reuters.
• White House said National Security Advisor Sullivan and Israeli official Dermer met to discuss the flow of humanitarian aid to Gaza and hostage talks, while it also said the US is not looking for war with Iran.
• US senior cybersecurity official Easterly said the US has ‘found and eradicated’ Chinese cyber intrusions in aviation, water, energy and transportation infrastructure.

UK/EU

NOTABLE HEADLINES

• ECB Chief Economist Lane said inflation is a "smaller problem" but it is still a challenge and the ECB needs more confidence that inflation is headed to the 2% target.