Treasuries Slide to Day’s Lows After Changes to FOMC Statement
Bloomberg 1/29/25
Treasury futures drop sharply to lows of the day after Fed keeps rates in target range of 4.25%-4.5% but makes some changes to its policy statement regarding inflation and employment which the market takes as hawkish.
Treasury yields cheaper by 3bp to 4bp across the curve in a bear-flattening move, sending 5s30s spread to lows of the day after the statement
Fed OIS prices in approximately 5bp of easing for the March policy meeting vs 7bp earlier Wednesday, and a total of about 43bp by year-end vs 48bp earlier

Reuters 1/30/25
The European Central Bank cut interest rates as expected on Thursday and kept more easing on the table, sticking to its view that inflation in the euro zone is increasingly under control despite concerns about global trade.

Bonds Slide After Fed Tweaks Language on Inflation Progress
By Sebastian Boyd
Bloomberg 1/29/25
Bonds extended declines as the FOMC held rates, in line with expectations, but removed language about inflation making progress toward its goal. That’s a hawkish tweak in the statement. The two-year yield jumped through 4.24% and the dollar pared earlier declines.

*FED REMOVES REFERENCE TO INFLATION MAKING PROGRESS TOWARD GOAL

Bloomberg 1/9/25
Several Federal Reserve officials confirmed Thursday the US central bank will likely hold interest rates at current levels for an extended period, only cutting again when inflation meaningfully cools.
Boston Fed President Susan Collins said Thursday a slower approach to adjusting interest rates is merited now as officials confront “considerable uncertainty” over the US economic outlook. The view was echoed by colleagues from other reserve banks and by Governor Michelle Bowman.

Bank of Canada Cuts Rates, Warns of Economic Shock From Trade Conflict
By Paul Vieira
Dow Jones — OTTAWA– 1/29/25
The Bank of Canada on Wednesday cut its benchmark rate for a sixth straight time, and warned of a significant shock to the economy from a U.S.-Canada trade conflict with tariffs of up to 25%.
Canada’s central bank lowered its policy rate by a quarter-point to 3. In its decision, the Bank of Canada said a recent rebound, fueled by aggressive rate cuts since last June, is in jeopardy should President Trump follow through on his threat of a 25% tariff on imports from Canada and Mexico. Canadian officials have vowed to retaliate forcefully with tariffs of their own.
“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada,” Gov. Tiff Macklem said, adding tariffs would also push prices higher.

Bloomberg 1/14/25
Members of President-elect Donald Trump’s
incoming economic team are discussing slowly ramping up tariffs
month by month, a gradual approach aimed at boosting negotiating
leverage while helping avoid a spike in inflation, according to
people familiar with the matter.
One idea involves a schedule of graduated tariffs
increasing by about 2% to 5% a month, and would rely on
executive authorities under the International Emergency Economic
Powers Act, the people said.
The proposal is in its early stages and has not yet been
presented to Trump, the people said — a sign that a monthly
stepped approach is early in the deliberation process.
Advisers working on the plan include Scott Bessent, the
nominee for Treasury secretary, Kevin Hassett, set to be
director of the National Economic Council, and Stephen Miran,
nominated to lead the Council of Economic Advisers, said the
people, who requested anonymity to discuss internal
deliberations.

Fed Rate-Cut Bets Get Pushed Into Second Half of 2025
By Kristine Aquino
Bloomberg 1/7/25
The stronger-than-expected services data just gave traders the green light to push their expectations for a rate cut into the second half of 2025.

Prior to Tuesday’s releases, traders were leaning toward a quarter-point reduction from the Federal Reserve by the June meeting. Yet growth and inflationary signals from the data suggest the US economy is accelerating.

That leaves the prospect of a rate cut as a theme for the second half of this year, for now. Yet if more signs of economic strength emerge, particularly from Friday’s nonfarm payrolls report, there’s every possibility that the notion of even just one cut this year becomes more far-fetched.

Bloomberg 1/10/25
US Treasuries plunged as evidence of a resilient labor market pushed traders to shift their expectations for the Federal Reserve’s next interest-rate cut to the second half of the year.
The selloff pushed yields higher across the curve on Friday after US employment in December advanced by the most in nine months, sending 10-year yields to the highest since 2023. Yields on notes maturing in two to seven years were all higher by more than 10 basis points, while the 30-year approached the 5% level.
Swaps traders are pricing in about 28 basis points of total Fed cuts this year, compared to about 38 basis points before the data release. A full quarter-point reduction isn’t seen until around October, from around June before the report.

Fed Minutes Suggest Officials Will Hold Rates Steady for Now
By Nick Timiraos
Wall Street Journal 1/8/25
The “vast majority” of the 19 officials who participated in that meeting thought a quarter-point rate cut was appropriate, the minutes said. But some officials thought there was merit in keeping rates unchanged last month, and a majority had indicated the decision to cut rates was a close call, according to the minutes.
The minutes further suggest officials were broadly comfortable holding rates steady at their upcoming meeting at the end of this month. “Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the minutes said. Officials thought under their current outlook for economic activity, the Fed could continue to cut rates at a slower pace than they had in recent months.
“Almost all participants judged that upside risks to the inflation outlook had increased,” the minutes said.
The economic forecast prepared by the Fed’s staff of economists also incorporated some initial assumptions about changes to tariffs that would lead inflation to be somewhat higher than previously anticipated in 2025 before resuming its recent decline after that.
In addition to the uncertainty over potential policy changes by Trump, who takes office on Jan. 20, Fed officials aren’t sure what constitutes a “normal” or neutral interest rate that neither spurs nor slows the economy. For much of last year, their benchmark interest rate sat near a two-decade high, at 5.3%, and nearly all officials thought rates were in restrictive territory.
But after cutting interest rates at their last three meetings by a cumulative percentage point since September, they are less certain over where rates sit relative to an unobservable “neutral” level. At a news conference after last month’s meeting, Fed Chair Jerome Powell said officials were ready to slow down cuts because of uncertainty over how restrictive their policy stance would be after having lowered rates by one percentage point.

Bloomberg 1/24/25
The Bank of Japan raised its key policy rate
Friday to the highest level in 17 years, as Governor Kazuo Ueda
continues his mission to return to central bank orthodoxy.
Ueda and his fellow board members lifted the overnight call
rate by a quarter-percentage point to 0.5% at the end of a two-
day meeting, according to a statement from the central bank. The
decision to hike was in line with market expectations. The BOJ
said it will continue to raise rates if its economic outlook is
realized.

US Fed cuts key rate a quarter point, signals fewer cuts ahead
AFP 12/18/24
The US Federal Reserve cut interest rates by a quarter point Wednesday and signaled a slower pace of cuts ahead, as uncertainty grows over inflation and President-elect Donald Trump’s economic plans.
Policymakers voted 11-to-1 to lower the US central bank’s key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement.
The sole holdout, who supported keeping rates where they were, was Cleveland Fed President Beth Hammack.
In updated economic forecasts published alongside the decision, members of the Fed’s rate-setting committee penciled in just two quarter-point rate cuts in 2025, down from an earlier prediction of four, and hiked their inflation outlook for next year, from 2.1 percent to 2.5 percent.

FOMC Statement
In support of its goals, the Committee decided to lower the
target range for the federal funds rate by 1/4 percentage point
to 4-1/24 to 4-3/41/2 percent. In considering the extent and
timing of additional adjustments to the target range for the
federal funds rate, the Committee will carefully assess incoming
data, the evolving outlook, and the balance of risks.

FOMC Press conference
So remember that we coupled this decision today with the extent timing language in the post-meeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments.

BBG *POWELL: STATEMENT SIGNALS AT OR NEAR PLACE TO SLOW, PAUSE CUTS

BBG 12/18/24
*POWELL: FED HAS BEEN MOVING POLICY TOWARD MORE NEUTRAL STANCE
*POWELL: OUR POLICY STANCE IS NOW SIGNIFICANTLY LESS RESTRICTIVE
*POWELL: CAN BE MORE CAUTIOUS AS WE CONSIDER MORE ADJUSTMENTS
*POWELL: WOULD SAY TODAY’S RATE DECISION WAS A CLOSER CALL

FOMC Press conference
>> CHAIR POWELL: There are countless models of what a neutral rate might be. Empirical models, theoretical models. And they have as many different answers as you would like. There’s no real certainty. And it’s a good thing to know that we don’t know exactly where it is. So you’re not tempted to think, oh, thing model or this estimate is right. You just have to be open to, you know, the empirical data that are coming in and how it’s affecting the outlook. And it’s not made easier by the fact that our policy works with long and variable legs. Nonetheless, that is the job we have so we’re, I think we need — it’s appropriate for us now to proceed cautiously now that we’re a hundred basis points closer to neutral. And we’ll do so. Meanwhile, the economy seems to be in good shape. And these cuts will certainly help to support economic activity and the labor market while we can still make progress on inflation because policy is still meaningfully restrictive.

Bloomberg 12/11/24
US Treasuries gained and traders boosted their bets on a Federal Reserve interest-rate reduction this month after a report showed consumer prices last month accelerated in line with expectations.
Yields on two-year notes, which are most sensitive to two central bank’s policy, reversed earlier increases to fall as much as three basis points to 4.12% on Wednesday. Traders priced in about 23 basis points worth of easing at the Fed’s December meeting, compared to 20 basis points prior to the report. Markets now see a roughly 92% probability the Fed will lower its benchmark by a quarter-point next week.

Dow Jones — OTTAWA 12/11/24
For the second time in a row, the Bank of Canada cut its main interest rate by a half-percentage point, saying lower rates are needed to address weaker-than-expected growth and a softening labor market.
In its final decision of 2024, the central bank lowered its target for the overnight rate to 3.25% from 3.75%, marking the fifth straight reduction in interest rates. The benchmark interest rate sat at 5% at the start of 2024. This also marks the first time excluding either a recession or extraordinary events — notably the Covid-19 pandemic, the 2008-09 financial crisis, and the Sept. 11, 2001 terrorist attacks — that the central bank has delivered back-to-back half-point cuts.

Bloomberg 12/2/24
Rates traders are heeding the message from Fed Governor Christopher Waller and have boosted the expected probability of a quarter-point rate cut this month to around 68%, from 59% at the end of last week. What’s more, the outlook for three reductions over the next year on a cumulative basis has once again firmed up.
Image
Remember that Waller has been regarded as an important bellwether for the central bank since late November last year, when he indicated a shift in his usually-hawkish stance to a more dovish one. That change kicked off a wave of bets that the Fed’s next move would be to lower borrowing costs, which were proven prescient.

( BBG) 12/06 13:30 *US NOV. UNEMPLOYMENT RATE 4.2%; EST. 4.1%

Bloomberg 12/2/24
Federal Reserve Governor Christopher Waller said he’s inclined to vote for another reduction in interest rates when officials meet later this month, though data due before then could make the case for holding them steady.
“At present I lean toward supporting a cut to the policy rate at our December meeting,” Waller said in prepared remarks at a conference on the Fed’s framework review in Washington sponsored by the American Institute for Economic Research. “But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”
Waller said recent data had raised concerns that inflation may be stalling above the 2% target but added “there is no indication” that prices in key service categories should remain at their current levels or increase.
“I believe the evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren’t pressing on the brake pedal quite as hard,” Waller said in the text of his remarks. “Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way.”

Bloomberg 12/6/24
US Treasuries rallied and traders boosted
their bets on a Federal Reserve interest-rate reduction this
month after a mixed November employment report.
Yields on two-year notes, which are most sensitive to the
central bank’s policy, slid four basis points on 4.10% on Friday
after data showed both nonfarm payrolls and the unemployment
rate increased last month. Traders are pricing in about 21 basis
points worth of easing at the Fed’s December meeting, from about
16 basis points before the data.

Bloomberg 12/10/24
Australia’s central bank said it’s “gaining
some confidence” that inflation is moving sustainably toward
target, prompting traders to boost bets on interest-rate cuts
starting as early as February.
The Reserve Bank left its cash rate at 4.35% on Tuesday in
a widely anticipated decision, marking more than a year at that
level. The rate-setting board said “some of the upside risks to
inflation appear to have eased” and scrapped a longstanding line
that it wasn’t ruling anything in or out on policy.
The Australian dollar fell as much as 0.9% and policy-
sensitive three-year government bond yields dropped 8 basis
points following the statement. Swaps traders boosted bets on a
February easing to almost 70% from 50% the previous day, with
contracts now fully pricing two rate reductions by May.

Bloomberg 1/29/25
The annual trimmed mean gauge of consumer prices, which shaves off volatile items, rose 3.2% in the three months through December, compared with an expected 3.3% gain, data from the Australian Bureau of Statistics showed Wednesday. On a quarterly basis, core consumer prices rose 0.5% versus a forecast 0.6%.

The Reserve Bank, which aims for the midpoint of a 2-3% CPI target, is focused on core inflation because government subsidies are suppressing headline prices. Trimmed mean CPI hasn’t been inside the band since the end of 2021.

The currency slid and the yield on policy sensitive three-year government bonds declined as much as 7 basis points. Stocks extended gains as money markets boosted bets on a February rate cut to better than 90%.

Bloomberg 11/13/24
Traders have grown more certain of a quarter-point Fed rate cut in December after inflation data came in line with economist estimates. They’re now pricing more than a 60% chance of a reduction next month, from a 50-50 probability seen on Tuesday.

Wall Street Journal 11/15/24
A Federal Reserve official said the central bank
could eventually need to slow down the pace at which it is lowering rates and
said it was too soon to say whether that should happen at the central bank’s
meeting next month.

Another rate cut in December is “certainly on the table, but it’s not a done
deal,” said Boston Fed President Susan Collins in an interview Thursday.
“There’s more data that we will see between now and December, and we’ll have
to continue to weigh what makes sense.”

The Fed’s next meeting is Dec. 17-18. Officials will see data on inflation and
employment for November before that meeting.

Bloomberg 11/25/24
US Treasuries have added to the gains spurred by the late-Friday announcement of Scott Bessent — a Wall Street veteran who investors expect will take the sting out of the administration’s more aggressive trade and economic policy proposals — as President-elect Donald Trump’s Treasury secretary choice.
Monday’s rally trimmed yields by more than 10 basis points across five- to 30-year maturities, gaining momentum in New York trading amid a drop in oil. The dollar slumped by the most in more than two weeks before paring the loss.
“Bessent is viewed as a potentially moderating influence on the incoming administration’s policies,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “Favoring gradualism on tariffs, for example.”

Bessent, who runs macro hedge fund Key Square Group, has called for a gradual approach to implementing trade restrictions and has appeared open to negotiating the exact size of tariffs championed by the president-elect. In an interview with the Wall Street Journal, Bessent said his priority will be to deliver on Trump’s various tax cut pledges, while also cutting spending and “maintaining the status of the dollar as the world’s reserve currency.”

New York Times 11/15/24
A strong economy is giving Federal Reserve officials room to move “carefully” as they lower interest rates, the central bank chair said.
Jerome H. Powell, the chair of the Federal Reserve, said that a solid economy with low unemployment, robust consumer spending and strengthening business investment gives the central bank room to take its time in cutting interest rates.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Mr. Powell said in a speech prepared for delivery in Dallas on Thursday. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
The Fed’s policy-setting committee meets next in mid-December, and while policymakers are expected to lower rates by a quarter point at that gathering, Fed officials themselves have made it clear that a reduction is not guaranteed.
Mr. Powell did not address December specifically in his prepared remarks. But officials have made it clear that they will be watching incoming data points — including inflation and jobs figures — as they decide what to do.
“The path for getting there is not preset,” Mr. Powell said on Thursday. “In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks.”

Bloomberg 11/21/24
Bank of Japan Governor Kazuo Ueda gave the
clearest hint yet that the central bank’s next monetary policy
meeting will involve a live discussion over whether to raise
interest rates.
“It’s impossible to predict the outcome of the meeting at
this point,” Ueda said in response to questions at a Europlace
forum in Tokyo on Thursday. “The next meeting is December, but
there’s still a month to go. The vast amount of data and
information will become available between now and then.”

Bloomberg 11/12/24
Germany’s new finance minister dismissed fears the political turmoil in Berlin will trigger a funding freeze, pledging the federal government will be fully capable of functioning in the weeks before February’s early election.
Joerg Kukies, appointed last week after Chancellor Olaf Scholz fired his predecessor and brought a premature end to the ruling coalition, said it’s still unclear whether Scholz’s minority government can get a supplementary budget for this year and the 2025 finance plan approved in parliament.
To do so, they’ll need the votes of opposition lawmakers. Friedrich Merz, the leader of the center-right CDU/CSU alliance, signaled earlier Tuesday the group may be willing to cooperate on this year’s budget, but Kukies said the situation remained very much in flux.
He conceded that it’s “not realistic” that the 2025 budget will get approval by the end of the year, meaning the government will be forced to resort to a temporary finance planning process to keep funds flowing.
While it’s not an ideal state of affairs and some new projects may face delays, Kukies said it’s not technically problematic and has happened multiple times before, including earlier this year after a constitutional court ruling upended the government’s finances.
The government “can and will fulfill all of its commitments,” he told delegates at a Sueddeutsche Zeitung forum in Berlin. He’s due to attend a meeting of the Bundestag’s budget committee on Wednesday.