FED: Musalem Notes Market Expectations For QT Runoff To End In H1 2026
St Louis Fed President Musalem echoed his colleagues Monday that the Fed still sees reserves as "abundant", though highlighted market expectations of an end to QT in H1 2025:
- "The New York [Fed] monitors very carefully whether we are still in an abundant reserves situation, and they publish many indicators that suggest that we are still in an abundant reserve situation. Our balance sheet has been declining gradually. We reduced the rate of rolloff earlier this year, so it's declining gradually. I would expect at some point in the future the committee to make a decision before we, or as we, feel that we are reaching that transition point between abundant reserves and ample reserves to - at that point - potentially pause the balance sheet rolloff. I've seen some market surveys that suggest - and these are not, the committee still needs to decide - but I've seen market surveys that suggest that could happen somewhere in Q1 or Q2 of next year, and could happen at around $2.9 trillion in reserves, plus overnight RRP."
- He may be referencing the NY Fed's Survey of Market Expectations - the latest edition of which is July's. That showed a median expectation for the SOMA portfolio's decline to cease in January 2026, with reserves at $2.875T and ON RRP at $125B for a total $3T.
- That was at the beginning of the Treasury's post-debt limit cash rebuilding process and may be due an update. The deadline for the latest questionnaire (September) was two weeks ago, and the results should be released the same day as the September FOMC Minutes - Oct 8.
- While Fed Chair Powell suggested last week the FOMC remains comfortable with the pace of QT, as he notes they are inevitably "getting closer" to an "ample" reserve level. In the latest week, reserves fell $131B, and over the last 4 weeks have fallen $277B. With reverse repo facility takeup nearing zero, that leaves reserves + ON RRP at just above $3T ($3.034T) as of last Wednesday. That was the lowest since November 2020 and very close to the $3.0T implied by the NY Fed's survey.
- Musalem also commented that QE shouldn't combine cooperation with Treasury: "I think it's very important to only use QE to support the dual mandate and to not be perceived as direct or indirectly, be helping with debt management responsibilities."
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
