E The Daily Shot And Data - September 22, 2016


We begin with the United States where, as expected, the Federal Reserve has left rates unchanged. The divided FOMC, however, hinted that a rate hike is coming soon.

Source: FRB

The futures-implied probability of a rate hike by year-end is now above 60%.

Source: CME

One of the key results from the FOMC meeting - something that the media doesn't seem to cover much - is another downgrade by the Fed of the US long-term growth. The central bank now believes (on average) that the United States economy won't grow faster than 2% in years to come. The FOMC has been steadily downgrading its expectation for long-term growth over the past five years - from 2.65% to 1.85%. 

As a result of the above, in just over a year, the Fed has downgraded the US long-run fed funds rate from 3.8% to 2.9%.

The FOMC has also been consistently downgrading the fed funds rate projections for the next couple of years.

Source: Bloomberg

In other US developments, markets remain convinced that inflation will stay benign in years to come.

Source: Macquarie, @joshdigga

According to the Mortgage Bankers Association, growth in US mortgage activity for home purchases, while still positive, has been declining.

Now let's turn to the funding markets, where US dollar LIBOR continues to grind higher.

Source: St. Louis Fed

At the same time, OIS rates have declined in response to the Fed's inaction, pushing the LIBOR-OIS spread to multi-year highs.

Source: Bloomberg

The uptake of the Fed's RRP program has been steadily rising as we approach the end of the quarter. Some expect the usage to spike on the last day of the month by more than it has in previous quarter-ends.

Next, let's go to Japan where the BoJ has shifted to a more flexible quantitative easing regime that would allow it to target specific portions of the yield curve rather than the blunt instrument of purely buying securities. The central bank also committed to allow inflation to rise above the 2% target. Here is a nice summary from Goldman.

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