One day after the much anticipated Fed announcement in which Yellen unveiled the “Great Unwinding” of a decade of aggressive stimulus, it has been a mostly quiet session as the Fed’s intentions had been widely telegraphed (besides the December rate hike which now appears assured), despite a spate of other central bank announcements, most notably out of Japan and Norway, both of which kept policy unchanged as expected.

“Yesterday was a momentous day – the beginning of the end of QE,” Bhanu Baweja a cross-asset strategist at UBS, told Bloomberg TV. “The market for the first time is now moving closer to the dots as opposed to the dots moving towards the market. There’s more to come on that front. ”

Despite the excitement, S&P futures are unchanged, holding near all-time high as European and Asian shares rise in volumeless, rangebound trade, and oil retreated while the dollar edged marginally lower through the European session after yesterday’s Fed-inspired rally which sent the the dollar to a two-month high versus the yen on Thursday and sent bonds and commodities lower. Along with dollar bulls, European bank stocks cheered the coming higher interest rates which should help their profits, rising over 1.5% as a weaker euro helped the STOXX 600. Shorter-term, 2-year U.S. government bond yields steadied after hitting their highest in nine years.

“Initial reaction is fairly straightforward,” said Saxo Bank head of FX strategy John Hardy. “They (the Fed) still kept the December hike (signal) in there and the market is being reluctantly tugged in the direction of having to price that in.”

The key central bank event overnight was the BoJ, which kept its monetary policy unchanged as expected with NIRP maintained at -0.10% and the 10yr yield target at around 0%. The BoJ stated that the decision on yield curve control was made by 8-1 decision in which known reflationist Kataoka dissented as he viewed that it was insufficient to meeting inflation goal by around fiscal 2019, although surprisingly he did not propose a preferred regime. BOJ head Kuroda spoke after the BoJ announcement, sticking to his usual rhetoric: he stated that the bank will not move away from its 2% inflation target although the BOJ “still have a distance to 2% price targe” and aded that buying equity ETFs was key to hitting the bank’s inflation target, resulting in some marginal weakness in JPY as he spoke, leaving USD/JPY to break past FOMC highs, and print fresh session highs through 112.70, the highest in two months, although it has since pared some losses.

Japanese shares extended this week’s rally as the yen fell on the U.S. Federal Reserve’s hawkish tone, even as the benchmark Topix index came off earlier highs after the BOJ kept its policy rate unchanged. “It’s been reaffirmed that BOJ will stand by its super easy monetary policy, making the yield gap between the U.S. and Japan widen further,” said Ikuo Mitsui, a fund manager at Aizawa Securities Co. in Tokyo. But “given the recent sharp gains in Japanese equities, investors may opt to stay on the sidelines to see how U.S. long-term yields and the foreign-exchange rate moves from here overnight.” The benchmark Topix index is heading for its best monthly performance since December, with automakers and banks contributing most to the gauge’s gains Thursday.

The dollar pared an earlier advance and West Texas crude fell. The Bloomberg dollar index extended gains overnight, rising a second day in the aftermath of the Fed meeting while gold dropped below $1,300 per ounce. EURUSD traded in a tight 1.1866-1.1919 range while the ten fell to a 2-month low of 112.72 versus USD as BOJ kept policy unchanged. Australian dollar extends overnight weakness amid declines in base metals, coupled with S&P downgrade of China’s sovereign rating.

Asia’s emerging-market currencies fell, led by South Korea’s won, after the Federal Reserve maintained its forecast for another interest-rate increase this year and indicated three more hikes were likely in 2018. The MSCI EM Asia Index of stocks and most sovereign bonds declined.

“The dollar could see a further technical rally and we should see weaker Asian currencies,” said Sim Moh Siong, a currency strategist at Bank of Singapore. “The message is that the Fed would like to get on with the job in terms of tightening. The market was only pricing one rate hike by the end of next year.”

The Norwegian krone spiked higher after the central bank kept its interest rate unchanged at 0.5%, but adjusted the rate-path forecast higher. The new rate path now begins rising in Q2 18, more hawkish than expected, but still first full hike not before Q3 19.

The hawkish Fed, weakened Asutralia’s ASX 200 (-0.9%) with gold miners weighed after the precious metal felt the brunt of a firmer USD in the aftermath of the Fed, while Nikkei 225 (+0.4%) outperformed on a weaker currency. Chinese markets were indecisive with Hang Seng (Unch.) and Shanghai Comp (+0.2%) choppy after a reserved PBoC operation and an increase in Hong Kong money market rates, although Macau gambling names were higher on optimism ahead of National Day holidays.  Following a tumble in the Yuan after the Fed announcement driven by a jump in the US Dollar, the Chinese currency was largely unchanged despite a downgrade by S&P, which cut China’s sovereign rating to A+, it first since 1999. While Chinese stocks were little changed, it was the latest move lower in Chinese commodities that has attracted attention, and overnight Iron Ore traded in Dalian slid by 4.7%, entering a bear market, down 22% from recent highs on declining demand, tougher seasonal pollution controls to come and less WMP “shadow capital” allocated to the commodity sector.

European equities advanced, led by banks on the back of the plunge in the Euro after yesterday’s USD surge, while bonds followed Treasuries lower as investors digested the Federal Reserve’s plans to pursue both higher interest rates and balance-sheet reduction in the coming months. The Stoxx 600 Index, up 0.2% at publication, was also boosted by the previous session’s drop in the euro, while lenders including Intesa Sanpaolo SpA benefited from the prospect of higher yields.

In rates, as the 10-year Treasury yield edged further toward 2.30% almost all government bond yields in Europe followed it higher: Germany’s 10-year yield rose three basis points to 0.47 percent, the highest in five weeks. Britain’s 10-year yield gained three basis points to 1.37 percent, the highest in seven months.

The higher dollar strained commodity markets, where the underlying raw materials are priced in the U.S. currency. Gold hit a three-week low of $1,296 per ounce, Brent and WTI oil eased away from multi-month highs, while industrial metals copper and nickel tumbled 1 and 3 percent to more than one-month lows. Brent crude futures LCOc1 last stood at $56.17, down slightly from late U.S. levels as U.S. benchmark West Texas Intermediate drifted down to $50.64.

Data include jobless claims and Philadelphia Fed business outlook. Scholastic and Presidio are reporting earnings.

Bulletin Headline Summary from RanSquawk

• The Greenback remains stronger against its pairs following the FOMC
• BoJ, Riksbank and Norges Banks all in Focus
• Looking ahead, highlights include: weekly jobs data, Philly Fed and ECB’s Dragh

Market snapshot

• S&P 500 futures little changed at 2,503.70
• STOXX Europe 600 up 0.2% to 382.85
• MSCI Asia down 0.7% to 163.36
• MSCI Asia ex Japan down 0.6% to 541.44
• Nikkei up 0.2% to 20,347.48
• Topix up 0.05% to 1,668.74
• Hang Seng Index down 0.06% to 28,110.33
• Shanghai Composite down 0.2% to 3,357.81
• Sensex down 0.2% to 32,332.15
• Australia S&P/ASX 200 down 0.9% to 5,655.42
• Kospi down 0.2% to 2,406.50
• German 10Y yield rose 3.0 bps to 0.473%
• Euro up 0.1% to $1.1909
• US 10Y yield rose 1 bps to 2.27%
• Italian 10Y yield rose 2.2 bps to 1.778%
• Spanish 10Y yield rose 3.1 bps to 1.613%
• Brent futures down 0.4% to $56.04/bbl
• Gold spot down 0.4% to $1,295.58
• U.S. Dollar Index down 0.1% to 92.41

Top Overnight News

• S&P Global Ratings cut China’s sovereign credit rating for first time since 1999, citing the risks from soaring debt, and revised its outlook to stable from negative. Rating was cut by one step, to A+ from AA-, the agency said in statement
• Yellen Brushes Aside Inflation ‘Mystery’ as Fed Eyes Rate Hike
• Google Buys HTC Talent for $1.1 Billion to Spur Devices Push
• BOJ left its target interest rates and asset-purchase program unchanged in an 8-1 vote, with new member Goushi Kataoka objecting; Kataoka argued there was little chance of reaching the BOJ’s inflation target by the projected time frame of around fiscal 2019
• U.K. PM May is said to be weighing whether to accept for the first time the need to discuss the EU’s demand for a “Brexit bill” of tens of billions of pounds, in a move designed to kick-start stalled negotiations
• Swiss inflation still is low, production capacity still not fully utilized despite a moderate recovery, the franc is still highly valued, and finally the interest-rate differential with foreign assets is small, SNB President Thomas Jordan said, according to Luzerner Zeitung
• New Zealand’s economy grew at 0.8% q/q in 2Q, matching estimates; the economy expanded 2.5% from a year earlier
• Anadarko Will Buy Back 10 Percent of Shares as Investors Agitate
• Beat or Miss? MiFID Will Make It Harder to Tell on Earnings Day
• Trump Has Allies Guessing on Iran Deal as U.S. Highlights Flaws

Asia equity markets were mixed as the region digested events from US, where the FOMC announced plan to begin balance sheet normalization as anticipated, and suggested increased prospects of a 3rd rate hike for 2017 as dot plot projections showed more committee members expect another hike by year-end. This weakened ASX 200 (-0.9%) with gold miners weighed after the precious metal felt the brunt of a firmer USD in the aftermath of the Fed, while Nikkei 225 (+0.4%) outperformed on a weaker currency. Chinese markets were indecisive with Hang Seng (Unch.) and Shanghai Comp (+0.2%) choppy after a reserved PBoC operation and an increase in Hong Kong money market rates, although Macau gambling names were higher on optimism ahead of National Day holidays. 10yr JGBs opened lower to track the declines in USTs and amid the heightened risk tone in Japan, although mild support was seen on return from the break after a somewhat dovish dissent at the BoJ. PBOC injected CNY 40bln via 7-day reverse repos and CNY 20bln via 28-day reverse repos.PBoC set CNY mid-point at 6.5867 (Prev. 6.5670)

Top Asian News

• BlackRock Sells Singapore Office Tower for $1.5 Billion to CCT
• AIA Buys Commonwealth Bank’s Life Unit for A$3.8 Billion
• Tencent Enters Old-School Finance With Stake in China’s CICC
• Yen Bears Awaken as Fed Tips Hawkish While the BOJ Digs in
• Rupee Slides With Indian Bonds on Bets Fiscal Deficit Will Widen

European equities are marginally higher across the board, aided by the Fed’s hawkish rhetoric which led to a weaker EUR. The banking sector noticeably out-performers amid the increased likelihood of a FOMC December hike, with Commerzbank extending on gains after UniCredit showed interest in a deal with the German Bank. Further reports circulated that the German Government favours a merger between the Commerzbank and France’s BNP Paribas, seeing an evident bid in the French giants. Global bonds trade around lows, following the previously stated Fed rhetoric. The UK 5-year yields have touched their highest levels since the Brexit vote. The weakness in Europe this morning has led to dealers liquidating longs, further adding to the selling pressure.

Top European News

• EU Unyielding on Brexit Leaves May With One Choice: Pay the Bill
• May to Test Limits of Money Pledges to Unlock Brexit Talks
• U.K. Budget Deficit Unexpectedly Narrows in Boost for Hammond
• The Russian Banking Analyst Who Predicted Deluge of Bailouts
• Norway Signals Tighter Monetary Policy Amid Economic Recovery
• Ryanair Downgraded at Kepler on Risks to Airline’s Cost Base

In currencies, the Central Bank theme continued today, noticeably from Scandinavia, as participants saw Minutes from Riksbank and an Interest Rate decision from Norway. The former noted that several board members highlighted the issue of an overheating economy, yet did note that there are no current signs of this. The SEK still saw a bid on these comments, as there is evident chatter of an overheating economy. The move was quickly retraced, as EUR bulls do remain in the market and the concerns of a heating economy were seemingly not an immediate concern. EUR/NOK saw a much firmer move following Norway’s interest rate decision, keeping their rate unchanged at 0.50%, however with increases to the medium term key policy rate resulted in EUR/NOK falling around 60pips. Kuroda spoke post BoJ, sticking to his usual rhetoric, where the BoJ kept monetary policy unchanged as expected. The decision on the yield curve control did see a lone dissenter, with new member Kataoka viewing it as insufficient to meeting the inflation goal by around 2019. The Governor stated that the bank will not move away from its 2% inflation target, resulting in some marginal weakness in JPY as he spoke, leaving USD/JPY to break past FOMC highs, and print fresh session highs through 112.70.

Commodities were mostly weaker with gold prices back below USD 1300/oz after the USD strengthened in the wake of the FOMC. Elsewhere, copper was also pressured alongside broad pressure in the complex and with selling exacerbated at the open of Chinese metals trade, while WTI took a breather from yesterday’s gains and was unchanged throughout the session.

Looking at the day ahead, the data due out includes initial jobless claims (which are expected to spike to 300k reflecting the recent storm and hurricane impacts), Philly Fed business outlook, FHFA house price index and conference board’s leading index. Away from the data, ECB President Mario Draghi is scheduled to make the keynote address at the second European Systemic  Risk Board annual conference in Frankfurt at 2.30pm BST. Shortly after this hits your email the ECB’s Smets will speak in Frankfurt at an ‘Understanding Inflation’ conference which could be worth a watch.

US Event calendar

• 8:30am: Initial Jobless Claims, est. 301,500, prior 284,000; Continuing Claims, est. 1.98m, prior 1.94m
• 8:30am: Philadelphia Fed Business Outlook, est. 17.1, prior 18.9
• 9am: FHFA House Price Index MoM, est. 0.4%, prior 0.1%
• 9:45am: Bloomberg Consumer Comfort, prior 51.9; Economic Expectations, prior 54
• 10am: Leading Index, est. 0.3%, prior 0.3%
• 10:15am: Fed’s Fisher Speaks at BOE Independence Conference, London
• 12pm: Household Change in Net Worth, prior $2.35t

DB’s Jim Reid concludes the overnight wrap

So what did we learn from the Fed and Yellen last night? Firstly we learnt that stopping reinvestment is a sideshow for now and that the market still cares more about the probability of a December hike and where the Fed thinks inflation is heading. Just briefly on the balance sheet run-off, they have committed to the plan from the June meeting of $10bn per month ($6bn USTs and $4bn Mortgages) with an incremental increase every 3 months until we get to $50bn. However on the rates and inflation outlook the committee and Yellen were on the hawkish side. As DB’s Peter Hooper discusses in his note, barring negative surprises in the months just ahead, the Fed is on track to raise rates once more this year and three times in 2018. Yellen recognised that inflation has been running low recently but put a higher blame on one-off factors than was perhaps anticipated. At the same time she noted that monetary policy operates with a lag and that labour market tightness will eventually push inflation up.

The complication for markets though is that beyond 2017, the FOMC will see a huge upheaval in its membership which could easily mean current member’s thoughts are meaningless in a few months time and also that Mr Trump’s fiscal plans (or lack of them) have the ability to completely change the debate. So its difficult to read too much into the current FOMC’s forecasts. However for now December is very much live with the probability of a December rate hike moving from a shade under 50% to 64% by the US close (using Bloomberg’s calculator). After trading with no great conviction in the lead up, 10y  Treasury yields spiked around 6ps higher immediately after the announcement but have retraced around 2bps of the move. The Dollar rallied with the Euro hitting $1.2033 just before the announcement but falling after to range trade between $1.1850-1.1900 into the close and where it remains in the Asian session.

Meanwhile the S&P 500 finally snapped its run of 6 consecutive sessions of moving in an intraday range of less than 0.35% to close +0.06%% (with a range of around 0.5%). However the VIX closed below 10 (9.78) for the first time since the day before Mr Trump’s “Fire and Fury” speech on August 9th. These moves came after equity and bond markets in Europe closed little changed (Stoxx 600 -0.04%, Bunds -0.9bps) although it’s worth noting the underperformance of Spanish assets (IBEX -0.83% and Spanish Bonds +2.3bps) following police raids of Catalan government offices ahead of the proposed  independence referendum. Staying with central banks, overnight we’ve had the BoJ meeting with policy left  unchanged as expected. However there was surprisingly one dissenter with new board member Kataoko voting for more stimulus. The vote was still 8-1 so it doesn’t really impact the likelihood of a change in policy soon. The Yen has been a touch weaker (now at 2-month lows) but thats as much due to Dollar strength after the Fed. Kuroda’s press conference starts at 7.30am BST. Ahead of this the Nikkei is +0.44%, with the Hang Seng +0.1% and the Shanghai Comp +0.2%.

So with the big policy meetings now out of the way, it feels like the next significant hurdle for markets in the remaining two days this week is UK PM Theresa May’s speech in Florence tomorrow. The latest   twist in the Brexit saga leading into this yesterday were the various reports suggesting that PM Theresa May was preparing to offer €20bn in budget contributions to the Europeans, and also that May had supposedly made peace with Foreign Secretary Boris Johnson following his resignation speculation on Tuesday. The EU have previously said that the UK has net liabilities of about €60bn so it remains to be  seen how May’s offer will be taken, assuming it’s true.

While we’re with the UK, the BoE hawks got a boost yesterday following the August retail sales data. Excluding fuel, sales jumped up a much better than expected +1.0% mom last month (vs. +0.1% expected) which in turn helped to push the annual rate up to +2.8% yoy from +1.7%. Including fuel, sales were also significantly better than expected (+1.0% mom vs. +0.2% expected). Separately, a BoE agents survey released yesterday reported a modest rise in labour costs in August. Sterling at one stage touched $1.3657 yesterday and a new post-Brexit high, before falling sharply after the Fed to close just below $1.35.

Over at the ECB, it is worth noting the somewhat hawkish comments from governing council member Klaas Knot yesterday. He said that “against the backdrop of an increasingly reflationary environment, the tail risk of a deflationary spiral is no longer imminent. Consequently, the main rationale for central bank asset purchases has disappeared”. Knot was also upbeat about inflation trending back to target and also downplayed concern about the recent euro appreciation. If anything the comments seemed to be somewhat on-side with the Reuters article from earlier this week which suggested that policy makers were debating the possibility of a close-ended tapering commitment, which we’d imagine is a more hawkish outcome compared to what the market is expecting.

Jumping back to politics and specifically Trump, it was interesting to note the Politico article yesterday suggesting that the ‘Big Six’ tax reform negotiators are due to release an update at some stage next week. The article suggests that the blueprint will include a corporate tax rate target of “lower than 20%” which would suggest a backing away of sorts from the 15% rate previously touted. The article also suggests that the announcement will include a move away from full and immediate expensing. The suggestion is that we should hear some of the new details in a scheduled address by President Trump on September 29th. However it’s possible that Treasury Secretary Mnuchin and NEC Director Cohn unveil details before that earlier in the week. So one to keep in mind. Also watch for a possible return of the heath care bill soon as various news outlets are suggesting that Senate Majority Leader Mitch McConnell plans a vote next week.

Before we look at today’s calendar, in terms of the other economic data released yesterday, in Germany PPI for August was reported as nudging up a little more than expected (+0.2% mom vs. +0.1%  expected) while in the US existing home sales for August were soft (-1.7% mom vs. +0.2% expected).

Looking at the day ahead, this morning we’re kicking off with more data out of the UK with the August public sector net borrowing figures, while later this afternoon we’ll get the September consumer confidence reading for the Euro area. Over in the US the data due out includes initial jobless claims (which are expected to spike to 300k reflecting the recent storm and hurricane impacts), Philly Fed business outlook, FHFA house price index and conference board’s leading index. Away from the data, ECB President Mario Draghi is scheduled to make the keynote address at the second European Systemic  Risk Board annual conference in Frankfurt at 2.30pm BST. Shortly after this hits your email the ECB’s Smets will speak in Frankfurt at an ‘Understanding Inflation’ conference which could be worth a watch. Fellow board member Peter Praet then speaks at the same conference at 10.30pm BST