While the Fed predictably gave no timeline for rate cuts this year, it flagged impressive disinflation and concerns about “overly restrictive” policy into a slowing economy – and risks to its dual mandate of stable prices and maximum employment in the event of an “abrupt downshift” in labor markets.
But Treasuries – where 10-year yields have retreated about 5 basis points from Wednesday’s 4% peaks – got an additional fillip from a Fed discussion about how it may trail a slowing of its balance sheet rundown – or “quantitative tightening” (QT) process.
Although Fed officials said market liquidity was still abundant, some pointed to the steep drop in daily takeup of the Fed’s “reverse repo” money draining facility and said it would be “appropriate” to begin discussing the factor that may lead the central bank to slow the balance sheet runoff and halt QT.
The effect of the Fed minutes combined with news U.S. job openings fell to nearly a three-year low in November and an ISM manufacturing survey showing another month of contracting activity and falling input prices.
The effect of the Fed minutes combined with news that U.S. job openings fell to nearly a three-year low in November as the labor market gradually cools and an ISM manufacturing survey showing another month of contracting activity and falling input prices.
With the fourth-quarter corporate earnings season looming next week, the cooling of the wider economy has seen the U.S. economic surprise index on the cusp of turning negative for the first time since May.
Richmond Fed boss Thomas Barkin struck a dovish note on Wednesday and flagged “real progress” on inflation that made a soft economic landing “increasingly conceivable”.
The upshot of all the new information was another slight drop in the futures’ market chances of first Fed rate cut by March to 75% – but with 146 bps of rate cuts still priced for the whole year. And U.S. stock futures have caught a break and are trading higher at last before Thursday’s open.
The dollar index retreated from near one-month highs as U.S. yields subsided.
