• FOMC stood pat on rates as expected whilst tweaking its language surrounding inflation (widely-touted)
• Asian equities mostly higher following a positive close on Wall St. No sustained USD reaction post-FOMC
• Looking ahead, highlights include Eurozone, UK and US mfg PMIs, US ISM mfg, supply from Spain and France and a slew of earnings

FOMC: Rates unchanged as expected, firms language on inflation

•  FOMC maintained its fed funds target at 1.25%1.50%, as expected.
• There were, however, more hawkish upgrades in the language of the central banks’ statement, dropping its reference to inflation remaining beneath 2% in the nearterm, and sees price pressures moving higher this year.
• It also acknowledged marketbased measures of inflation compensation have increased over the last few months, though they still remain “low”.
• Regarding growth and household spending, the FOMC now characterises both as “solid”, and sounded upbeat on the economy.
• In wake of the release, markets price c.90% chance of a March hike, with the probability of tspanee rate rises in 2018 at c.67% vs 60% at the close of trade on Tuesday.

ASIA

Asia equity markets were mostly higher as region digested a slew of earnings and after initial momentum from the US, where stock markets looked past the widely-anticipated hawkish language tweak by the FOMC and topped off the best monthly performance in the S&P 500 and DJIA since 2016. ASX 200 (+0.9%) and Nikkei 225 (+1.5%) traded higher with the rebound in crude fuelling outperformance in Australia’s energy sector, while Japan led the gains in the region amid a softer JPY and deluge of corporate earnings. Conversely, Shanghai Comp. (-1.0%) and Hang Seng (-0.3%) were less inspiring and traded choppy after a 6th consecutive open market operation skip by the PBoC and an inline Chinese Caixin Manufacturing PMI release, while a slump in Shenzhen stocks to 6-month lows also triggered further mainland pressure. Finally, 10yr JGBs were lower amid the positive risk tone in Japan, although prices were supported off lows after stronger demand in the 10yr JGB auction.

Chinese Caixin Manufacturing PMI Final (Jan) 51.5 vs. Exp. 51.5 (Prev. 51.5). (Newswires)

PBoC skipped open market operations again today for a daily net drain of CNY 80bln. (Newswires)

PBoC set CNY mid-point at 6.3045 (Prev. 6.3339)

UK

EU is said to be considering a tax blacklist and penalties on UK state-subsidized companies after Brexit, as sanctions to stop UK undercutting the EU economy. (FT)

A senior UK non-cabinet minister is reportedly preparing to resign and denounce UK PM May from the backbenches, which a report stated could trigger the PM's downfall. (Sun)

UK PM May has warned EU citizens that should they arrive in Britain after Brexit, they could lose some of their rights; setting up a potential clash with the EU. (Telegraph)

EU

Italy's 5-Star leader tells investors he'd be prepared to govern with Forza Italia and PD as part of a broad coalition, according to sources. (Newswires)

German Chancellor Merkel's conservatives and SPD are not planning any changes to their proposals regarding Europe's future that was set out in a preliminary agreement made last month. (Newswires)

FX

In FX markets, the USD traded relatively flat and near pre-FOMC levels as markets had widely expected a hawkish tweak under Yellen’s last Fed policy meeting. This kept the greenback’s major counterparts range-bound overnight in which EUR/USD and GBP/USD were uneventful, with the latter stuck around 1.4200. Elsewhere, antipodeans remained subdued with AUD/USD briefly pressured after disappointing Building Approvals data and as calls for a rate hike by the RBA were further pushed back following yesterday’s CPI miss, while NZD also languished in sympathy.

Australian Building Approvals (Dec) M/M -20.2% vs. Exp. -7.6% (Prev. 11.7%, Rev. 12.6%). (Newswires)

Australian Building Approvals (Dec) Y/Y -5.5% vs. Exp. 11.5% (Prev. 17.1%)

COMMODITIES

Commodities saw marginal gains overnight in which WTI crude briefly tested USD 65/bbl in an extension of yesterday’s advances. This was despite the weekly DOE inventory report showing a larger than expected build in headline crude stockpiles, as the other product components all showed drawdowns. Elsewhere, gold is flat despite carving a USD 15/oz range in the aftermath of the FOMC, while copper is marginally higher amid the mostly positive risk tone in the region.

China 2017 gold consumption rose 9.4% Y/Y to 1089 tonnes, while its 2017 output fell 6.0% Y/Y to 426.1 tonnes. (Newswires)

COMMODITIES US

Treasury yields were mixed on Wednesday. The short-end of the curve saw yields rise towards session highs in wake of the FOMC’s signal that inflation pressures are seen firming, keeping it on course to continue its hiking trajectory. However, the long end of the curve found buyers, helping major curve spreads to continue flattening. 2s10s was c.1bps lower at settlement, 2s30s were c.4bps narrower, 5s30s c.4bps flatter. 10-Year T-Note futures settle 2 ticks lower at 121-18+.

In the US Treasury’s Quarterly Refunding announcement, the US Treasury raised the sizes of the 2- and 3-year note auctions by $2bln per month. As a result, the size of 2- and 3-year note auctions will increase by $6bln by the end of the quarter. In addition, Treasury will increase the auction size of the next 2-year FRN auction by $2bln in February. Finally, Treasury will increase auction sizes by $1bln to each of the next 5-, 7-, and 10-year notes and the 30-year bond auctions starting in February. In total, these adjustments will result in an additional $42 billion of new issuance for the upcoming quarter. The increased issuance was a little more aggressive than markets had anticipated.