FED: FOMC Minutes: More QT Discussion Than Anticipated
The first thing that stands out in the January FOMC minutes was the surprising amount of balance sheet discussion, considering there was little said at the meeting press conference or indeed since then by participants. This appears to have been a modest surprise to markets as well: 10Y Swap spreads widened by about 2bp after the minutes release.
- Overall on QT, there doesn't appear to be much of a rush to shift gears. The SOMA manager "noted that a range of indicators continued to suggest that reserves had remained abundant over the intermeeting period. However, the manager cautioned that the debt limit situation may cloud the signals provided by the indicators. In addition, reserves might decline quickly upon resolution of the debt limit and, at the current pace of balance sheet runoff, might potentially reach levels below those viewed by the Committee as appropriate."
- One of the theories behind an early-2025 end to QT was that the Fed would lose visibility on reserve scarcity when Treasury was impacted by the debt limit, and the uncertainty would lead to an end to runoff, but that hasn't happened and doesn't seem to be the prevailing sentiment by FOMC members.
- The Committee was briefed on post-QT reinvestment options, which unsurprisingly involved reinvesting MBS proceeds back into Treasuries, though there seems to be some optionality in the approach to adjusting the maturity composition of the Treasury portfolio: "The scenarios presented corresponded to different trajectories of the holdings of Treasury securities in the SOMA. Under all scenarios considered, the maturity composition of Treasury holdings in the SOMA portfolio moved into closer alignment with the maturity composition of the outstanding stock of Treasury securities. The scenarios differed on how quickly this alignment would be achieved and, correspondingly, on the assumed increase over coming years in the share of Treasury bills held in the SOMA portfolio."
- In the end, no decisions were made, and it sounds like those who were concerned about the impact of the debt limit on reserves were in the minority. For now while it is notable that details of post-QT operations have been discussed, we would think that this is still a decision for mid-year at the earliest (consensus is shifting toward Q3 as opposed to Q2 at the outset of the year). That's particularly since Fed leadership including Powell and NY Fed's Williams seem to regard reserves as remaining abundant.
- Per the minutes: "Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event. Several participants also expressed support for the Desk's future consideration of possible ways to improve the efficacy of the SRF."
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USDJPY TECHS: Support At The 50-Day EMA Remains Intact
- RES 4: 159.45 High Jul 12
- RES 3: 159.26 0.618 proj of the Sep 16 - Nov 15 - Dec 3 price swing
- RES 2: 158.08/87 High Jan 15 / 10 and the bull trigger
- RES 1: 156.66 20-day EMA
- PRICE: 155.64 @ 16:47 GMT Jan 20
- SUP 1: 154.97 50-day EMA
- SUP 2: 154.44 Low Dec 19
- SUP 3: 154.16Trendline support drawn from the Sep 16 ‘24 low
- SUP 4: 153.16 Low Dec 17
The trend condition in USDJPY is unchanged, it remains bullish and last week’s move lower appears corrective - for now. The pair has traded through the 20-day EMA and an extension lower would signal scope for a deeper retracement. Support to watch is 154.97, the 50-day EMA. A return higher and a breach of 158.87, the Jan 10 high, would confirm a resumption of the uptrend and open 159.45, the Jul 12 ‘24 high.
UK: Gov't Rejects Unionist Calls For Pulling 'Stormont Brake'
The UK gov't has confirmed that it has rejected a request from unionist parties in Northern Ireland to invoke the post-Brexit 'Stormont brake'. The 'Stormont brake' permits members of the legislative assembly (MLAs) at Stormont to object to EU laws if they see them as having a "significant impact specific to everyday life of communities in Northern Ireland in a way that is liable to persist". A motion from the hardline unionist Democratic Unionist Party (DUP) was backed by all unionist MLAs claiming that changes to EU rules on packaging and labelling of chemicals would have a "significant and prolonged" impact in Northern Ireland and that they would not be required in the rest of the UK.
- Secretary of State for Northern Ireland Hillary Benn, in a letter to Speaker of the Assembly Edwin Poots, said that the new rules did not reach the threshold for implementing the brake.
- DUP leader Gavin Robinson said the decision was 'wrong' and 'utter foolishness.' As Sky News reports, "If the brake had been pulled, there would have been unprecedented and intensive talks between the UK and EU, and possibly a vote on the rules applying in Stormont. It would undoubtedly have torn the scab off some of the old Brexit wounds, at a time when Sir Keir Starmer's government has much more pressing matters to attend to. It didn't happen this time…but it's unlikely unionists will be deterred from trying again in the future."
EURGBP TECHS: Trend Needle Points North
- RES 4: 0.8545 High Aug 21
- RES 3: 0.8530 76.4% retracement of the Aug 8 - Dec 19 downleg
- RES 2: 0.8494 High Aug 26 ‘24
- RES 1: 0.8474 High Jan 20
- PRICE: 0.8454 @ 16:46 GMT Jan 20
- SUP 1: 0.8403/8355 Low Jan 16 / 20-day EMA
- SUP 2: 0.8336/8284 50-day EMA / Low Jan 8
- SUP 3: 0.8263 Low Dec 31
- SUP 4: 0.8223 Low Dec 19
EURGBP maintains a firmer tone and the cross traded to a fresh short-term cycle high Monday. The latest recovery undermines the recent bearish theme and suggests scope for stronger short-term gains. Recent resistance points at 0.8376, the Nov 19 high, and 0.8448, the Oct 31 high, have been breached, strengthening the current bullish theme. Sights are on 0.8494 next, the Aug 26 ‘24 high. Support at the 50-day EMA is at 0.8336.
