• FOMC left rates unchanged as expected and announced a ‘technical’ cut in the IOER; Chair Powell stated that he does not see the case for moving policy in either direction
• Asian indices were mixed, as most of the region returned from market holidays, somewhat diverging from the negative Wall St lead
• Sources state that a US-China trade deal may be possible by next week, with reports indicating that there has been significant progress; however, the details still need to be worked out
• Looking ahead, highlights include German Retail Sales, EZ Manufacturing PMIs, UK Construction PMI, US Initial Jobless Claims and Labour Costs, US Factory Orders, BoE Rate Decision, Inflation Report and Press Conference, ECB's Praet, supply from France
• Earnings: Activision Blizzard, DowDuPont, Exelon, BNP Paribas, Volkswagen, Shell

FOMC

- FOMC left the Fed Funds Rate rates unchanged at between 2.25%-2.50% as expected with the decision unanimous, while it cut interest on excess reserves (IOER) by 5bps to 2.35% to keep fed funds rate well within target range

- Fed stated that overall and core inflation have declined on a 12-month basis but added that data received since March indicates economic activity has risen at a solid pace and it removed its reference to low inflation being due to energy prices. FOMC added job gains have been solid although growth of household spending as well as business and fixed investment have slowed.

- Fed reiterated patience as it determines what future adjustments to rate might be appropriate and are to roll over principal payments from its holding of treasury securities that exceed USD 15bln as previously announced.

- Fed Chair Powell commented during the press conference that the change in IOER was technical and not a shift in Fed policy, while he added that a small deviation outside of Fed funds target range would not be important and suggested they could look at the idea of a Repo facility at an upcoming meeting. Furthermore, Powell commented that the inflation drop in early 2019 was unexpected and there might be transitory factors at work, while he does not see case for moving policy in either direction and that the data is not pushing Fed in either direction.

The press conference was viewed as less dovish than some had hoped for as Powell attempted to navigate a neutral line and suggested the IOER was a technical adjustment that does not represent any shift in the Fed's policy stance, while markets also focused on the view that the unexpected decline in core inflation is likely to be transitory. In addition, Powell was pressed on conditions that the Fed would need to see before considering cutting rates but seemed to be reticent to be drawn into the question and instead reiterated the Fed's policy targets. 

ASIA-PAC

Asian equity markets were mixed as the region partially shrugged off the negative lead from US where all major indices were pressured, and the S&P 500 snapped a 3-day streak of record closes after Fed Chair Powell downplayed prospects for looser policy at the post-FOMC presser. ASX 200 (-0.7%) traded negative with the index led lower by financials after AMP Capital reported net cash outflows widened in Q1 and with ‘Big 4’ bank NAB also weighed after it lowered its interim dividend by 16%. Elsewhere, both KOSPI (+0.5%) and Hang Seng (+0.6%)recovered from early losses on return from Labour Day holidays amid US-China trade optimism as reports suggested a trade deal could be possible by the end of next week, while China also recently announced several measures to open up its financial sector to foreign companies in a concession to the US. As a reminder, Japan and mainland China remained closed for holidays.

A trade deal between US and China is said to be possible by the end of next week, according to sources. Reports noted US and China are said to have neared a deal to roll-back some tariffs which could be announced by the end of next week, while both sides have reached an understanding on how to enforce the agreement although the sources cautioned that details still need to be worked out when a Chinese delegation arrives in Washington on 8 May. Furthermore, there was said to be a general agreement on a plan for the US to immediately remove a 10% tariff on a portion of the USD 200bln worth of Chinese imports but the USD 50bln tranche of 25% tariffs may remain potentially to after 2020. (Newswires/WSJ/Politico) 

UK/EU

UK PM May is reportedly preparing to accept that customs rules with the EU will be maintained for years post-Brexit in a deal with opposition Labour party. (The Times) However, seperate reports state that a senior cabinet minister suggested a deal involving a customs union could be backed by as few as 90 Tory MPs and would mean a slew of resignations the government. (Guardian)

UK government may drop plans to conduct a 3-year spending review and instead opt for a 1-year programme amid Brexit fallout and uncertainty on PM May's future. (Guardian) 

FX

USD firmed following the post-FOMC press conference which was less dovish than some had hoped. This weakened EUR/USD briefly below 1.1200 although it has since recovered as a large option expiry of EUR 1.2bln at the aforementioned level attracts price action, while GBP/USD retreated from near 1.3100 before finding support around its 100DMA of 1.3044. Elsewhere, antipodeans also weakened in the aftermath of the FOMC but have nursed some losses in Asia trade with AUD/USD recovering from near the 0.7000 level, while there were also comments from NAB’s CEO who dismissed calls for an RBA rate cut next week as he views it as unnecessary and suggested it would do little to stimulate the economy.

COMMODITIES

Commodities were subdued overnight with price action dampened amid the mixed risk tone and after the FOMC. As such, WTI crude futures were kept rangebound which was in contrast to the prior day’s swings as bearish inventory data initially weighed on prices which gradually recovered amid supply concerns associated with Iran and Venezuela. Elsewhere, gold prices were heavily pressured as the greenback surged post-FOMC and copperlanguished following its recent slip to 2½-month lows not helped by the absence of its largest buyer China.

World Gold Council said Q1 global gold demand rose 7% Y/Y to around 1.05K tons and noted continued growth in central bank purchases. (Newswires)

Oman Oil Minister said the June OPEC meeting will be to extend OPEC cuts and that the oil market will remain balanced even post end of Iranian crude import waivers, while he added USD 70/bbl is an appropriate price for producers and consumers. (Newswires)

US

USTs floundered at the start of the day on thin volumes ahead of the Fed, with modest starting gains surrendered following a better than expected ADP report, with some traders noting a large block flattener of over 13k FVM9s vs over 2K ultra longs. Thereafter, however, ISM manufacturing missed at 52.8 vs. exp. 55 which added upside to the complex, with a large block buyer of 8k USM9 calls noted. The meat of the day, however, was then the Fed’s decision, which saw the curve steepening and treasuries pushing higher, with increased volumes on the front end post the unchanged rate and IOER 5bps cut to 2.35%.  Yields broke the 10th April 2.461% low, but the move was faded after Powell stated the “surprising” inflation prints could be transitory, and the IOER cut was purely “technical”. Thereafter the curve flattened and treasuries slipped to session lows heading into the close. US T-note futures (M9) settled 3 ticks lower at 123-18+.