while WE slept: stocks are BID and bonds are, too; Global Wall reacts TO hawkish hold; options trade @ 1123a?; "Dept. of Market Perversity"; "...FOMzzzz…"
Bond traders kept in limbo Bond traders emerged from the Fed meeting with little conviction about where rates are headed as Trump casts uncertainty over the direction of the economy.
Treasury yields briefly jumped after the central bank’s statement appeared to indicate it held rates steady because its progress on taming inflation had ebbed. But Jerome Powell swatted away those worries — saying he expects consumer-price increases to slow further— and yields came back down, ending the day virtually unchanged and echoing the swings in US stocks.
Powell did little to chart the bond market’s direction. He said he expects that the still-restrictive level of rates will slow inflation, which appeared to ease concern that the Fed could shift gears to raising rates. He also declined to comment on how Trump’s policies may affect the Fed’s path.
“This does not sound like a Fed that’s looking for the next opportunity to cut rates,” Bob Michele, JPMorgan Asset Management’s chief investment officer for global fixed income, said on Bloomberg Television.
Traders are anticipating just one more quarter-point reduction this year, with the potential of a second such move. US GDP data today may show a slower pace of economic growth, while on Friday the Fed’s preferred inflation gauge is forecast to show a slight acceleration in December.
“There’s heightened caution in the bond market at the moment,” said Lon Erickson, a portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico. “There’s nervousness around the outcome of those policies of the administration.” —Liz Capo McCormick and Ye Xie
Limbo or not, someone had a good day (hint: NOT necessarily those of JPM clients who are net longest since 2010 but rather some options player … ).
I ALSO noticed we had some funTERtaining trade data in the morning before the FOMC …
ZH: Biden Leaves Office With All-Time-Record US Trade Deficit In December
… setting table for ‘47 nicely ahead of the (dovish pause, BMOs words / call, not mine) FOMC meeting.
On THAT note, a few relevant and thought-provoking links from the intertubes with some of Global Walls views to follow …
WolfST: Fed Pivots to Wait-and-See, Keeps Rates at 4.25%-4.50%, Restarts Inflation Worries. QT Continues. And labor market conditions are no longer easing. The reasons for further rate cuts — dropping inflation, weakening labor market — vanished. Pretty hawkish.
WolfST: Powell: In “No Hurry” to Cut, Need to See “Further Progress” on Inflation, No Timeline to End QT (Not Even Close). “Companies figured out they do like to raise prices. But we also hear a lot from companies these days that consumers have really had it with price increases.”
ZH: Wall Street Responds To The Fed's Hawkish Pause
More on Global WALL victory laps below … NOT so much a victory lap, well THEN there’s this …
ZH: Trump Slams Hawkish Fed For 'Failing To Stop The Problem They Created'
"Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing...
...but I will do much more than stopping Inflation, I will make our Country financially, and otherwise, powerful again!
The Fed has done a terrible job on Bank Regulation.
Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses.
If the Fed had spent less time on DEI, gender ideology, "green" energy, and fake climate change. Inflation would never have been a problem.
Instead, we suffered from the worst Inflation in the History of our Country!"
And cue the outrage at Trump daring to question the oracles in The Eccles Building…
… Rate-cut expectations for 2025 are sliding lower (hawkish)...
"The Fed’s statement was somewhat hawkish relative to last month, so it isn’t surprising that the knee-jerk reaction was for some modest bear flattening,” Bloomberg Intelligence US interest rate strategists Ira Jersey and Will Hoffman say.
“As we also noted, the press conference may cause even more volatility than these modest shifts in the statement.”..
… and exactly how did you think this would go over with ‘47 …?
By days end … the doubling back and correcting himself helped …
ZH: Powell Saves Markets From Hawkish Fed Statement, But Mega-Cap Meltdown Resumes
…We use the 10Y Yield here to show the swings intraday. The initial spike lifted yields up near pre-DeepSeek levels, only for Powell's pontifications to send yields back down...
Source: Bloomberg
Rate-cut expectations tumbled on the Fed - not bouncing back much on Powell's prevarications...
Source: Bloomberg
… AND here we are. I’ll quit while I’m behind … here is a snapshot OF USTs as of 644a:
… for somewhat MORE of the news you might be able to use … a few more curated links for your dining and dancing pleasure …
The Fed kept rates on hold today, leaving the upper bound of the federal funds rate at 4.50%. The decision was widely anticipated, and as a result nobody questioned or pushed Powell on the decision during the press conference. The update to the press release was initially interpreted as hawkish, as the 'progress toward' the inflation objective part was removed. Powell dismissed this, and simply attributed it to cleaning up the language, removing references to the first half of last year.
I dunno about you, but I love Guns & Roses. Apparently so, too, does this economist …
BARCAP: Federal Reserve Commentary: January FOMC: All we need is just a little patience
As widely expected, the FOMC held the funds rate steady and signaled that they are in a holding pattern, for now, as they monitor the evolution of the data and await news about policies and how they will play out. The pause will extend at least through the March FOMC meeting, in our view.
…We retain our baseline projection that the FOMC will cut rates only once, by 25bp, this year in June, with core PCE inflation expected to rise again in H2 25 amid increased import tariffs and tighter immigration restrictions. We then expect the Committee to resume its rate cutting campaign around mid-2026, with three 25bp cuts that year, bringing the target range to a modestly restrictive 3.25-3.50%, under the working assumption that the longer-run neutral policy rate is around 3.00-3.25%.
… same shop on the days TRADE data …
BARCAP: Trade data downgrades our Q4 GDP estimate to 1.7% q/q saar
Today's incoming data imply a substantially wider December trade deficit than we had expected. These and other revisions mark down our Q4 GDP estimate by 1.0pp to 1.7% q/q saar. We still expect tomorrow's advance GDP report to show that momentum in PDFP carried into the end of 2024.
… Team Rate CUT for the win (except for, well, you know, the FOMC meeting and all).
As expected, the FOMC left policy rates unchanged at 4.33% and didn't change any of the forward guidance. The decision was unanimous. That being said, there were a few changes to the first paragraph of the statement that have triggered some price action. Most notably, the language on inflation changed. The Old: "Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated." The New: "Inflation remains somewhat elevated." Similarly, the new language on employment reads, "The unemployment rate has stabilized at a low level in recent months, and labor conditions remain solid." In essence, the Fed took the active language out of the statement -- "made progress" dropped for inflation and "generally eased" was removed for employment. It's a reasonable interpretation that the downward trajectory has stalled -- hence the bearish response in Treasuries.
Since the headlines, yields increased, but it was very much an in-range move as the market awaits the details from Powell's press conference. We expect a more balanced tone from the Chair that keeps rate cuts on the radar during 2025…
Mom always said to have manners, say please and thank you … had NO idea this would / might work with regards to the FOMC but …
We believe Fed Chair Powell is keeping his options open, with a wide range of outcomes possible in the coming months from the new administration’s policies and little downside to waiting.
We continue to see the FOMC on a policy hold of indefinite duration as it awaits further clarity on tariffs, foresees US economic resilience and awaits further progress on inflation.
We change our call for the end of balance sheet runoff to July, as the FOMC does not seem to be near the finish line.
I HATE to wait … they say it’s hard. Some go so far as to say it’s the very hardest … here’s one such shop with a note …
The Fed held rates steady as Chair Powell argued the Committee is not in a hurry to cut rates further. Although Powell did not explicitly take a March rate cut off the table, his emphasis on the underlying strength in the economy and a "solid" labor market indicated a baseline of holding next meeting as well.
Questions in Powell's press conference focused heavily on how upcoming policy changes from the Trump administration could impact the monetary policy outlook. Powell noted that while they are considering scenario analysis around possible outcomes, there remains considerable uncertainty about the details of these policies. As a result, the Committee is in a "mode of waiting."
Today's meeting fits with our preexisting view for the Fed, which is that a skip at the January meeting is likely to turn into an extended pause. In our view, the nominal neutral rate is around 3.75%, and there is a need for the Committee to stay restrictive relative to that level. As such, the fed funds rate is likely to remain above 4% this year, with a base case of no additional reductions. For a full discussion of our outlook for the economy and the Fed, see our latest publication: "Trump II: Growth too fast, inflation too furious for Fed cuts".
Departing from the FOMC recap / victory lap theme if only for a moment, for these words on UST DEMAND …
DB: Foreign demand for U.S. Treasuries: Recent trends and outlook
Foreign net purchases of US Treasuries were remarkably strong in 2024, totaling more than $650bn and comprising over half of the net issuance of Treasury notes and bonds in the twelve months through October. However, these inflows were entirely driven by foreign private investors, while official sector net purchases were close to zero.
We delve into the data and explore the possible drivers of this recent foreign demand. Looking ahead, we expect a similar level of activity from foreign investors in 2025, though several risks – including uncertainty around trade policy, rising domestic yields in Japan, and potential position reductions by offshore hedge funds – could weigh on demand.
… always used to look for whatever foreign PRIVATE investors were up to as they are not tasked with defending a currency or a political view. They can chase best returns and if they don’t, well, they would be summarily dismissed. All positions are created equally (just ask JPMs clients) its just that some are more equal than others…
Same firm not playing a card game but rather suggesting how this time IS in fact, different …
Every easing cycle is different, and this one is no exception. The current monetary easing cycle's four-month US Treasury 10-year excess return performance is the joint worst, tied with the 1981 cycle, which included a rate hike within four months of the first cut.
Analysis of historical precedents reveals two primary drivers of persistent excess UST10y returns during easing cycles: (1) a structural decline in term premia (e.g., in the mid-1980s) and (2) significantly deeper rate cuts, usually due to exogenous shocks (such as the Global Financial Crisis and the COVID-19 pandemic).
The barriers to positive excess returns during this cycle are higher. First, term premia should be on a secular upward trend, reflecting, among other factors, the ongoing shift in supply and demand dynamics. Second, the Fed's easing cycle will be constrained by additional fiscal stimulus while the economy is growing above potential, inflation is above target, and the labour market is at full employment. We made these arguments last August when we recommended going short UST10y despite the forthcoming Fed rate cut. We reiterated them in September when we argued that the US yield curve was likely to twist-steepen on a 50bp cut.
Looking ahead, achieving positive excess returns on UST10y will likely require either a material tightening of fiscal policy or an exogenous systemic shock.
So, no dovish pause, but rather a hawkish hold …
ING: Hawkish hold from the Fed to test Trump’s patience
Robust activity, a solid jobs market and sticky inflation justify the Fed's decision to hold interest rates steady. The hawkish tilt from officials may in part be a message to President Trump that they won't bow to his will on interest rates and suggests a clear and unambiguous weakening in the data is required to prompt further action. We think it will come, but not before June
Reaction TO the FOMC … stay long, young man, stay long …
MS: FOMC Reaction: January Meeting | US Economics & Global Macro Strategy
The Fed retained confidence in further disinflation, though it is "not in a hurry to cut." We expect two rate cuts this year, in March and June, but the bar to a March cut appears higher. Our strategists stay long UST duration via 5-year notes, and maintain long MBS basis.
Key expectations
The FOMC kept the target funds rate unchanged at 4.375%. The statement signaled that the Fed sees downside risks to labor markets as ameliorated. We think near-term rate cuts will be dependent on inflation and, likely, delayed tariff implementation.
Powell said the Fed will not set policy based on expectations of changes to trade, immigration, deregulation, or fiscal policies. He said the Fed will wait and see what arrives before making adjustments.
We retain our call for a March rate cut on our favorable inflation forecast, though we view the bar as higher now than before. The Fed also appears comfortable letting the balance sheet shrink further.
Our rates strategists suggest investors stay long US Treasury duration via 5-year notes and remain positioned for a 25bp rate cut at the March FOMC meeting.
Our FX strategists continue to suggest short USD positions against EUR, JPY, and GBP.
On agency MBS, our strategists remain overweight mortgages.
As expected, the FOMC today left policy rates unchanged and signaled that they were not in a hurry to lower rates further.
Canadians cut rates — thats nice — what do they say ‘bout us …
RBC: The Federal Reserve Buys Time: Rates on hold and lips sealed
The U.S. Federal Reserve says “thank you for calling, please hold” as it keeps policy rates unchanged and makes almost no adjustments to its recent narrative that inflation and the labour market are back to appropriate levels…
…From the totality of today’s communication, we keyed in on 3 themes that will likely continue to weigh on the Fed narrative ahead.
1. The Fed’s focus is shifting back to the inflation side of its dual mandate…
2. Data dependence still rules the Fed's next move...And we think is consistent with a further pause…
3. What wasn’t said might turn out to be more important for the Federal Reserve in 2025…
…Regardless, this may be the last meeting where Chair Powell can avoid integrating the disruption that a variety of proposed policies will likely have on existing forecasts – in either direction. That is likely as unsettling for them as it is for markets, who will continue to be at the mercy of a shifting economic landscape over the next year.
While global elites have left the Swiss Alps, there are those who’ve got privilege of working for bank of that land … and yes, they TOO have a view on US rates and the FOMC …
The Federal Reserve did nothing on rates, which seemingly displeased US President Trump. Uncertainty about the inflationary impact Trump’s policies might reduce the chance of a March rate cut, but characterizing policy as restrictive does suggest future rate cuts are plausible. Overt criticism of the Fed by Trump risks tilting the Fed toward hawkishness in any close call decision, to prove their independence.
The Trump administration seemingly retreated from its freeze on federal grants and loans, though legal challenges to the original order may continue. Near-term disruption should be minimized. The economic question is whether people whose incomes depend on such transfers become more uncertain about the future (risking an increase in savings).
The ECB meets and 63 out of 63 surveyed economists think there will be a 25bp rate cut. The idea that so many economists are wrong is, obviously, outside the limits of human comprehension. The ECB is likely to lower real interest rates this year…
Same firm ON the (weakening again) US economy and mtg apps …
We've updated our Q4 GDP tracking We noted the risk in our preview last week that the latest flurry of December data could move around our Q4 GDP tracking and the combination of yesterday's stronger durables report, and today's trade and inventories data left our tracking for the advance print of Q4 real GDP, which will be released tomorrow, at 1.8% (saar). This is lower than our prior estimate with slightly less negative equipment investment (-5.9% saar), a - 0.5pp net exports contribution and a 0.5pp inventories drag. This would imply a slightly lower Q4/Q4 change of 2.4% versus the 2.5% implied by our prior projection…
…MBA mortgage applications soften Mortgage applications for purchase declined 0.4% in the week to January 24 after rising in recent weeks, likely driven by a rise in activity in the first unadjusted week after the holiday season and the increase could have involved some payback after the December lull. The contract rate on the 30-year mortgage was unchanged at an elevated 7.02% in the week to January 24 after rising of late.
The January meeting sounded a lot like the December meeting
… As we wrote last week, the data has yet to make a compelling case for a March rate cut, and today's comment reiterating "not in a hurry" when asked about March, stopped well short of Governor Waller's comments two weeks ago, when he said he would not rule a March cut out. There is a fair bit of data to get, however, between now and March. We expect the year-over-year changes in core inflation to resume moving lower, a sizeable downward revision to the level of employment with implications for forward months, and weakening in some related indicators like a coming uptrend in initial claims for unemployment insurance. Chair Powell's basic message, spread throughout the press conference, was that the bar for resuming rate cuts was more obvious progress on inflation moving toward 2%, though it did not need to be 2% he said, and unexpected softening in the labor market. "We will be focusing on seeing real progress on inflation, or alternatively, some weakness in the labor market, before we consider making adjustments," he said…
Plainly speaking …
WELLS FARGO: FOMC on Hold and In No Hurry to Cut Further
Summary
As universally expected, the FOMC decided at its policy meeting today to keep rates unchanged. The decision to maintain the target range for the federal funds rate at 4.25%–4.50% was universally supported by all 12 voting members of the FOMC.
The post-meeting statement continued to describe the pace of economic activity as "solid." It also upgraded its characterization of the labor market. Previously, the Committee said that "labor market conditions have generally eased." The FOMC now views labor market conditions as "solid."
The FOMC continues to characterize inflation as "somewhat elevated."
In sum, there was little in today's statement to suggest the FOMC is contemplating another rate cut in the near future.
With the pace of real economic activity holding up and with inflation remaining above target, we think the FOMC will keep rates on hold until the second half of 2025.
… And from the Global Wall Street inbox TO the WWW … a few curated links …
First up, Atlanta — something something giveth, something something taketh away …
FRB Atlanta: Fourth-Quarter GDP Growth Estimate Decreased - January 29, 2025
…Latest estimate: 2.3 percent — January 29, 2025
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2024 is 2.3 percent on January 29, down from 3.2 percent on January 28. After this morning’s Advance Economic Indicators release from the US Census Bureau, the nowcast of fourth-quarter real gross private domestic investment growth decreased from 0.1 percent to -0.9 percent, while the nowcast of the contribution of net exports to fourth-quarter real GDP growth fell from 0.10 percentage points to -0.61 percentage points.
On the heels of yesterday’s note / thoughts on JPMs client longs (biggest since 2010), well, to turn a phrase … funding secured …
BLOOMBERG: Trader Mints Millions in Hours on Bond Options Bet Tied to Fed
Bearish 10-year note hedge bought pre-Fed, expired at close
Bond drop post-Fed boosted position, which cost $2.3 million
A bond trader appears to have hit the jackpot on a one-day options bet that Treasury yields would climb Wednesday after the Federal Reserve’s decision, potentially raking in millions of dollars in profits.
The position was in the so-called Treasury ‘Weekly’ options, which are short-term expiries designed to cover key market-moving risk events. It likely wasn’t the only such bearish options bet placed on the day, but the size stands out.
The trader spent about $2.3 million in premium on the bearish hedge, bought at a price of 3 ticks a few minutes before 11:30 a.m. New York time Wednesday. Within roughly 10 minutes of the 2 p.m. release of the Fed’s policy statement, the wager traded as high as 9 ticks, data compiled by Bloomberg shows — triple the entry point.
If the entire position had been unwound at the peak, it would have resulted in a roughly $4.6 million profit, although the limited volumes seen at that level indicate that the trader likely didn’t unload the entire wager.
The trade proved profitable because of traders’ hawkish take on the Fed’s policy statement, in which the central bank announced its decision to pause after a series of interest-rate cuts since September. Trading in many of these contracts is anonymous, making it difficult to identify the firms involved and the exact details of the trade.
The Fed’s statement included language tweaks that appeared to upgrade officials’ labor-market assessment, and it also changed their language around inflation. At the time the trade was executed, US 10-year yields were trading at around 4.54%. The yield peaked at almost 4.59% on the day, and have since settled back to around 4.53% after Fed Chair Jerome Powell’s press conference ended.
In the statement, officials repeated that inflation remains “somewhat elevated” but removed a reference to it having made progress toward their 2% goal. In his press conference, Powell said that change wasn’t intended as a policy signal.
… this would run in stark contrast TO those more bullish (net LONGs) of JPMs clients but hey, for every buyer there’s another buyer? Sounds like at least someone had an exciting day rather than a snoozer, eh?
BLOOMBERG: AI Euphoria Saves Big Tech From So-So Earnings When you buy a company’s stock, you buy its future earnings. It’s still amazing how much can be taken on trust.
…FOMzzzz… Central bankers don’t, as a rule, want to make news. Occasionally, they might try to generate a response by deliberately engineering a surprise, but that’s generally when the stakes are high. Most of the time, their aim is to merge into the background. That was Fed Chair Jerome Powell’s target ahead of Wednesday’s meeting of the Federal Open Market Committe, and he hit the bull’s eye. Amid surging political waves in Washington, and just minutes before the tech titans would take the stage, he offered a placid and torpid Sargasso Sea.
Everyone knew that the Fed wouldn’t change interest rates. They also did nothing to change their policy of gradually reducing thebalance sheet. Instead, the greatest excitement in its communique came from a slight alteration in language about inflation and unemployment. Last month, the FOMC statement said:
Labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
This month that changed to:
The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
So if the labor market is solid rather than easing, and the Fed no longer says it’s making progress toward the2% target, that sounds like a distinct shift toward hawkishness — a propensity to make the next move a hike. Then Powell was asked about what appeared to be a critical signal in his Q&A. His response:
If you just look at the first paragraph, we did a little language cleanup there… We just chose to shorten that sentence.
For fed funds rate futures, the outcome by the end of the day was to reduce very slightly the chance that the Fed will cut at its June meeting or before. The odds of this moved from 110% to 95%, however, meaning that it’s still perceived as a virtual certainty:
The effect of the Fed’s language cleanup —and Powell’s subsequent attempt to clean up how people had interpreted it — was clearly visible across broader financial markets. The dollar, the gold price, the 10-year Treasury yield, and the S&P 500 all moved sharply. Those moves were completely reversed on Powell’s clarification. In the final analysis, the Fed did a good job of convincing people that it wanted to cut rates, but was in no hurry to do so:
His invitation to side with the hawks thus rebuffed, Powell went on to refuse to answer questions about the Trump administration. Tariffs could affect the battle against inflation, and the Fed is not going to say anything until it knows what they are…
AND believing everything I read on the intertubes, especially, X … this next tweet resonated with me …
AT mark_ungewitter
Bond reversal scenario. –Dept. of Market Perversity
