A couple of notables.
The Fed minutes skewed hawkish and reception for Wednesday’s 20-year supply was — how should I put this? — less than enthusiastic.
Neither of those developments should’ve been expected to garner much in the way of attention on “Nvidia day,” but if you’re concerned with rates, you were interested. Or you pretended to be, anyway.
As discussed briefly in the weekly macro preview, the account of the January FOMC meeting was too stale to matter. Even if Jerome Powell hadn’t ruled out a March cut (he did), subsequent data erased any chance of an early start to what both markets and Fed officials now agree should be somewhere in the neighborhood of 75bps worth of easing in 2024.
Any color from the minutes underscoring the Fed’s intention to hold terminal was thus redundant. But the language vis-à-vis upside risks to inflation was a bit more direct than I expected. Consider this passage, for example:
As an upside risk to both inflation and economic activity, participants noted that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending last year. Furthermore, several participants mentioned the risk that financial conditions were or could become less restrictive than appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall. Participants also noted some other sources of upside risks to inflation, including possible disruptions to supply chains from geopolitical developments, a potential rebound in core goods prices as the effects of supply-side improvements dissipate, or the possibility that wage growth remains elevated.
The account of last month’s gathering included all the obligatory nods you’d expect to disinflation progress and a more balanced labor market, but the excerpt above, and specifically the déjà vu-inducing allusion to the risk that easier financial conditions could stoke price pressures, pretty plainly suggests this isn’t a Committee on the brink of cutting rates.
The minutes also noted that “most” participants flagged risks associated with “moving too quickly to ease the stance of policy,” while only “a couple” spoke out about the “downside risks to the economy associated with maintaining an overly restrictive stance for too long.” Again: The bias is to hold terminal.
Meanwhile, at the above-mentioned 20-year sale, a tail of more than 3bps was indicative of lackluster demand as was non-dealer bidding of 78.8%, nearly 10ppt below average. Dealers were left with 21.2% of the sale versus the typical 12%.
BMO’s Vail Hartman offered a concise assessment, consistent with the kind of brevity and precision the bank’s US rates team is known for. “20-year yields have repriced >4.50% in the wake of January’s inflation data leaving the auction to clear at the highest level in three months,” Hartman wrote. “Nonetheless, we suspect a meaningful contingent of buyers will remain sidelined as January’s bounce in inflation has very quickly renewed angst over a higher r-star in the post-pandemic era and even led to some speculation that rate hikes could make their way back into the policy discussion.” That’s pretty solid work.
