GBPUSD TECHS: Northbound

The minutes to the May 6-7 FOMC meeting (out 1400ET) are considered more stale than usual given the major swing in sentiment and markets from the May 12 announcement of a China-US de-escalation in trade tensions.

• But uncertainty still lingers, not least regarding the Fed's reaction function when weighing up the risks of missing on the inflation vs employment side of the dual mandate.
• So perhaps the most intriguing aspect of the May discussion will be the degree to which participants saw tariff-generated inflation as transitory. Minneapolis Fed President Kashkari intriguingly noted this week that there was a "healthy debate" among the FOMC (possibly referring to May's meeting) on this subject: "At the Federal Reserve there is a healthy debate among policymakers about whether to “look through” the inflationary effects of the new tariffs. The look-through arguments view tariffs as creating a one-time change in the price level—a transitory inflation shock. This view prioritizes support for economic activity by lowering the policy rate while the economy transitions to its new equilibrium, at which point inflation will have returned to a 2 percent rate, albeit at a higher overall price level."
• For his part, Kashkari is among what seems to be a majority of members who are concerned about such inflation not being a transitory shock - he namechecks another in his speech ("As my colleague Beth Hammack, president of the Cleveland Fed, recently said, 'I would rather be slow and move in the right direction than move quickly in the wrong direction.')
• Leading the "transitory" vanguard is Gov Waller, who while still patient on taking action until H2, still envisages rate cuts this year: following the US-China detente on May 12, he said he is eyeing what he previously called a "good news" rate cut scenario with tariff inflation proving transitory, as opposed to a  recessionary "bad news" scenario.
• For the upcoming minutes, we will take note of  whether there is a number noted of participants who hewed toward Waller's view - or whether, as it seems more broadly, the majority of the Committee either is agnostic on the subject and doesn't want to pre-commit and/or is concerned about potential second-round effect should inflation expectations rise on tariff hikes.

The 5Y Note auction was typically solid in May, with the 4.071% high yield representing a 0.4bp trade-through versus the 4.075% when-issued yield at auction cutoff.

• This was the 6th 5Y auction in the last 7 to trade through, and May's sale came with more solid peripheral statistics than usual:
• A record (going back to data from the early 2000s) high 78.4% takedown by indirects (seen by some as a proxy for foreign investors) was a highlight, and well up from the 69.0% prior 5-auction average.
• And primary dealers took down just 9.2% of competitives, below the 11.7% average of the prior 5 auctions, and the lowest since January 2023 - which was in turn the lowest on record (going back to the early 2000s).
• Bid-cover of  2.39x was exactly in line with the 5-auction average.
• Market reaction was positive: 5s richened about 0.5bp on the 2s5s7s butterfly, with 10Y yields down 1.4bp to 4.477%.

• US TSY 5Y NOTE AUCTION: HIGH YLD 4.071%; ALLOTMENT 23.12%
• US TSY 5Y NOTE AUCTION: DEALERS TAKE 9.24% OF COMPETITIVES
• US TSY 5Y NOTE AUCTION: DIRECTS TAKE 12.39% OF COMPETITIVES
• US TSY 5Y NOTE AUCTION: INDIRECTS TAKE 78.37% OF COMPETITIVES
• US TSY 5Y AUCTION: BID/CVR 2.39