Ramifications of FOMC decision on treasury yields, PCE and other macros

In the repercussion of the much-awaited Fed's meeting outcome fixed income trades with a better tone. US Treasuries are consolidating their post-meeting gains, fortified by both press conference comments by Fed Chair, Yellen and a subdued policy outlook transmitted. Issues around China clearly remain on the radar, but the passing of this near-term Fed event risk is expected to encourage increased market participation.

Looking forward, a hike remains on the cards though, given that the FOMC has decided to uphold the tone around eventually tightening policy. This backdrop is ultimately projected to limit both the downside in yield terms at the front-end of the curve and the degree of any follow through curve steepening pressure. Inbound supply (2, 5 and 7yr Note sales due next week) will also weigh on the minds of more tactically minded players.  Elsewhere, the dearth of macro data flow will leave the ramifications of the FOMC outcome as key drivers of activity.

We continue to believe that signs of a boosting job market will render it difficult to push implied 1st BoE hike expectations back much beyond recent dovish extremes with regards to the domestic policy rate outlook. In such an environment we anticipate a narrowing in the recent gulf between the respective BoE and Fed implied policy outlooks, allowing for a tightening in 5yr US-UK spreads.

Policy considerations aside, the gilt market is also bracing itself for upcoming supply in the form of an index-linked 2068 syndicated sale. Subject to market conditions, this is likely to price on Tuesday, with solid underlying end user demand expected to support this sizeable supply operation.

So overall, Yellen's press conference and Fed's statement hinted to soften its inflation projections over the forecast horizon. The underlying strength of the US economy, especially the labour market, was acknowledged by the Committee in its updated macroeconomic projections. This underpinned a downward revision in the median forecast for the unemployment rate over 2016-18 to below its long-run equilibrium rate of 4.9%. This indicates that labour market slack is set to diminish further.