Week in Review: Fed Holds Rates Steady, Will Reduce Balance Sheet

For the week ending 22 September 2017

  • Fed will reduce balance sheet beginning October
  • Trump levies sanctions against North Korea
  • S&P downgrades China's credit ratings
  • US home sales declined in August
  • 7.1 magnitude earthquake strikes Mexico

Global equities remained flat for the week, with the US 10-year Treasury note yield slightly higher at 2.24%. The Chicago Board Options Exchange Volatility Index (VIX) was flat at 10.0, and the price of West Texas Intermediate crude oil ended the week at around $50.56 a barrel.

MACRO NEWS

Fed holds rates steady, will start reducing its balance sheet in October
On Wednesday, the US Federal Reserve announced that it would leave its benchmark interest rates unchanged but suggested that a hike is likely by the end of the year. Officials projected there would likely be three rate increases in 2018 and two in 2019. In addition, Fed officials projected GDP to come in at 2.2% this year, slightly higher than their expectations back in June. They also reduced their inflation expectations from 1.7% to 1.5% and now expect that inflation will not reach 2% until 2019. As expected, the Fed also announced plans to start reducing its $4.5 trillion balance sheet of Treasuries and mortgage-backed securities in October. It will roll off $10 billion initially and then increase the cap by $10 billion every quarter until the total reaches $50 billion.

President Trump signs new sanctions order against North Korea
On Thursday, US president Donald Trump signed an executive order that will allow him to take action against anyone who finances and facilitates trade with the North Korea. Trump plans to use the measure to cut off funding for North Korea's nuclear weapons program and to put pressure on its economy. The president addressed the United Nations General Assembly earlier this week, encouraging members to take further action to influence the regime. 

China's credit rating downgraded  
On Thursday, Standard and Poor's downgraded China's long-term sovereign credit rating from AA- to A+, following a similar downgrade by Moody's in May. S&P claimed that China's sustained period of strong credit growth has increased its economic and financial risks. The credit rating agency expects credit growth will persist at levels that increase the country's financial risks for the next two to three years. In addition, S&P demoted China's short-term rating from A-1+ to A-1.

US home resales drop to 12-month low
US home resales fell 1.7% to a seasonally adjusted annual rate of 5.35 million units in August, the lowest since August 2016. A sharp decline of 25% year on year in home sales in Houston, related to Hurricane Harvey, accounted for most of the overall decline in sales. The South saw a 5.7% decline. Continued aftereffects of the hurricane are expected to negatively impact home sales in September.

 Mexico hit by earthquake
Central Mexico was hit with a 7.1 magnitude earthquake earlier this week, causing hundreds of buildings to collapse in Mexico City. An estimated 273 people are dead and 1,900 injured. At least 1,700 homes were destroyed across the region. The death toll is likely to increase as rescue workers continue to search for survivors trapped beneath collapsed buildings. Trading on the Mexican stock exchange was suspended following the quake.

Republicans closer to tax-cut plan
Top Republicans on a US Senate panel proposed a budget deal that would allow for up to $1.5 trillion in tax cuts over the next 10 years. The tax cuts would add to the current $20 trillion federal debt, which is projected to increase to about $30 trillion over the next decade. Republicans hope to pass the bill by year-end.

Spanish police arrest Catalan officials
In an attempt to prevent Catalonia from moving forward with a banned independence referendum, Spanish police raided Catalan government offices on Wednesday, arresting at least 12 Catalan government officials. In response, tens of thousands of people protested outside several regional government offices and in several Catalan cities.

BOJ holds interest rates steady at 0.1%
On Thursday, after its two-day policy meeting, the Bank of Japan announced that it will hold interest rates steady at 0.1%. The central bank also kept its yield target for 10-year Japanese government bonds at around 0%. Dovish board member Goushi Kataoka was the sole dissenter.

 

THE WEEK AHEAD

Date

Country/Area

Release/Event

Tue, Sep 26

United States

New home sales

Wed, Sep 27

United Kingdom

House prices

Wed, Sep 27

US

Durable goods orders

Thu, Sep 28

US

Average weekly earnings

Thu, Sep 28

Japan

Consumer price index, unemployment rate

Fri, Sep 29

eurozone

CPI

Fri, Sep 29

Canada

GDP

Fri, Sep 29

Japan

Housing starts

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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