STIR: Fed Rate Path Close To Recent Hawkish Extremes Before US-China Talks
May-09 18:23
- Cumulative cuts from 4.33% effective: 5bp Jun, 17.5bp Jul, 35.5bp Sep, 51bp Oct and 68bp Dec.
- A recap of the week’s hawkish readjustment:
- Monday’s hawkish reaction to a better-than-expected ISM Services report was reversed on Tuesday but still held onto a significant hawkish re-pricing seen in the second half of the prior week on a better-than-expected ISM Manufacturing report (Thu) before a solid payrolls report (Fri).
- Wednesday’s FOMC decision had little net immediate reaction, with a modest dovish read on the announcement itself reversed in Powell’s press conference, but prospects of a US-UK trade pact floated afterwards helped extend trade optimism following a touting of a removal of Biden-era chip curbs.
- Rather than a "sell the fact” reaction to Thursday’s actual US-UK trade pact announcement, the sell-off in US rates accelerated and set the tone for the remainder of the week.
- A typically dovish Williams today keeping to a similar stance to Powell might have helped at the margin but the moves are likely on expectations of some positive developments at Saturday’s Geneva-based talks between the US and China, led by US Tsy Sec Bessent and China Vice Premier He Lifeng.
- A next Fed cut is fully priced for the Sept FOMC (17.5bp for July) before a cumulative 68bp of cuts for the year.
- SOFR implied terminal yields have seen a smaller increase over the week but are still 4bp higher, at ~3.25% (seen in SFRZ6 vs U6 a week ago). That’s a large adjustment from sub 2.9% prior to Thursday’s ISM mfg but still 15bp lower than before Apr 2 Liberation Day tariff announcement levels.
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US TSY FUTURES: BLOCKs: Additional Crosses Pre/Post Minutes
Apr-09 18:19
- Both appear to be buys:
- 7,000 TUM5 103-16.5, through 103-15.38 post time offer at 1400:13ET, trades 103-13.5 last (-16.5)
- 5,000 FVM5 107-25.75, post time offer at 1356:20ET, trades 107-16.25 last (-1-00.75)
TARIFFS: Current State Of EU, Mexico, Canada Tariffs Left Unclear
Apr-09 18:14
Is the EU part of the 10% / 90 day pause club? There is a lot of ambiguity in the announcement and Tsy Sec Bessent failed to clarify this (and also added to the confusion with MX and CA, see below). Having announced retaliation vs the US today, the EU could be considered excluded - however unlike China's retaliatory moves which are in place, the EU's retaliatory tariffs only go into effect April 15.
- And it seems that the main thrust of the announcement is to isolate China.
- So at the moment we (and the markets) are operating under the assumption that the EU is in the 10% / 90 day negotiation window though we await an official announcement.
- Re Mexico and Canada, per BBG's Canada reporter on X.com, @btaplatt: "It's going to take a bit to get clarity on whether any of this affects Canada. In theory it shouldn't, as Canada wasn't included in the reciprocal tariff order. Scott Bessent said yes when asked if Canada/Mexico are at 10% but, uh...we'll have to see whether he misspoke."
US TSYS: Post-March FOMC Minutes React
Apr-09 18:11
- Treasury futures remain near session lows, little react to release of FOMC minutes that note risks to increased inflation and elevated policy uncertainty.
- Focus remains squarely on Pres Trump tweet upping China tariff to 125% while granting 90 day pause for 75 other countries while lowering to reciprocal tariff level to 10%.
- Most notable for Tsys is the swing in curves - from new 3 year highs overnight (2s10s tapped 73.847) to -14.830 flatter at 41.283 at the moment.
- Projected rate hike pricing retreats: current levels vs. this morning (*) as follows: May'25 at -5.3bp (-11.8bp), Jun'25 at -19.1bp (-34.8bp), Jul'25 at -34.9bp (-58.4bp), Sep'25 -50.2bp (-76.2bp). Year end projection of 75bp total rate cut vs. full point this morning.
