FED: Notable Divergence Of Opinion On Direction Of The March Dots (1/3)
Mar-18 18:27
This week's FOMC decision release is setting up to be unusually uncertain for a meeting in which there will be no change in actual rate policy.
- As we wrote in our Analyst Outlook for the Fed Preview (link), overwhelming consensus is that the "Dot Plot" medians for 2025-2026 will be unchanged from December's edition - so still showing 50bp of cuts this year (3.9%) and 50bp next (3.4%).
- That's not a surprise, with FOMC participants seen as holding their rate views steady as they weigh the risks of higher inflation vs weaker growth/employment amid major government policy shifts.
- What is surprising to us is that there is a split opinion on the direction of the shift in the dot distribution with many analysts seeing risks tilted toward it moving lower - in other words, a dovish shift in the dots is expected, even if this doesn't translate into a change in the medians themselves. We go through various opinions in the subsequent two notes (excerpted from our Fed preview).
- We would have expected more analysts to place more weight on continued stubbornly high inflation readings, the prospect of higher goods inflation under tariffs, increasingly "in no hurry to cut" commentary from FOMC participants, and the passage of time, in eyeing a drift higher in the dot distribution, for 2025 at least. We provide more detail on this in our Fed preview.
- Our Policy team cites multiple ex-staff/FOMC participants as pointing to current members eyeing 2 or, if not, fewer cuts for 2025 in the Dot Plot as well ("MNI: Fed SEP To Show 2 Or Fewer Cuts, Two-Sided Economy Risks").
- Instead, many analysts appear to believe that FOMC participants will be expressing greater concern over growth than inflation, and/or leaning into market pricing which is between 2 and 3 cuts.
- In the few outright calls for changed 2025-27 medians we have seen, one analyst (Citi) expects an outright move lower in the median (3.6% for 2025), while two (Barclays, UBS) see one cut removed from the rate cut path through 2026 (4.1% median for 2025).
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US TSYS: Yields Pull Back Again With Consumer Growth Story In Question
Feb-14 21:08
Treasuries outperformed global counterparts Friday, fully completing a reversal from a midweek selloff.
- A large miss in January retail sales (-0.9% M/M vs 0.7% prior, -0.2% consensus) represented the biggest sequential drop in 22 months, with a similarly weak "control group" figure leading to a 0.5pp downgrade to the Atlanta Fed's GDP nowcast (to 2.3% GDP growth in Q1, i.e. no acceleration from Q4).
- That was enough to see the 10Y Treasury yield drop 7bp in the subsequent half hour, continuing the downtrend seen beginning in the immediate aftermath of Wednesday's hot CPI release. 10Y yields dropped over 21bp from the Wednesday high to Thursday's low, ultimately ending a tumultuous week 1.5bp lower.
- Yields ticked a little higher in afternoon trade Friday but the curve leaned bull steeper on the day, with the belly outperforming: 2-Yr yield is down 4.6bps at 4.261%, 5-Yr is down 5.7bps at 4.3328%, 10-Yr is down 5.1bps at 4.4782%, and 30-Yr is down 3.9bps at 4.6982%.
- In futures: Mar 10-Yr futures (TY) up 9/32 at 109-08 (L: 108-26 / H: 109-15.5).
- Other data (industrial production mixed, import prices soft) had little lasting impact.
- The coming week’s data schedule is relatively light, due in part to Monday’s Presidents Day holiday (SIFMA recommends bond cash close, equities closed), with initial jobless claims, February prelim PMIs, and regional Fed manufacturing surveys among the highlights. Supply includes 20Y Bond and 30Y TIPS auctions.
- We also get plenty of Fed communications including the January meeting minutes, and speaking appearances by both doves (Gov Waller) and hawks (St Louis Pres Musalem).
USDCAD TECHS: Bear Cycle Extends
Feb-14 21:00
- RES 4: 1.4948 High Mar 2003
- RES 3: 1.4814 High Apr 2003
- RES 2: 1.4503/1.4793 High Fb 4 / 3 and key resistance
- RES 1: 1.4380 High Feb 10
- PRICE: 1.4175 @ 16:54 GMT Feb 14
- SUP 1: 1.4107 50.0% retracement of the Sep 25 ‘24 - Feb 3 bull cycle
- SUP 2: 1.4011 Low Dec 5 ‘24
- SUP 3: 1.3944 61.8% retracement of the Sep 25 ‘24 - Feb 3 bull cycle
- SUP 4: 1.3894 Low Nov 11 ‘24
USDCAD broke lower Thursday, breaking out of a tight trading range this week and remains soft. A key support at 1.4261, the Jan 20 low, has been cleared and this signals scope for an extension of the current bear cycle - a correction. Scope is seen for a move towards 1.4107, a Fibonacci retracement. Initial firm resistance to watch is 1.4380, the Feb 10 high. A break would highlight an early bullish reversal signal.
OPTIONS: Mixed SOFR Rates Trade To Cap Week
Feb-14 20:47
Friday's US rates/bond options flow included:
- SFRH5 95.62p, traded half in 2k.
- SFRH5 96.93c, traded 0.25 in 4k.
- SFRH5 95.75/95.62ps 1x2, Traded 3.75 in 3k.
- SFRK5 97.00c, traded for 0.75 and 1 in 3k.
- SFRU5 95.93/95.81/95.68p fly, traded 1 in 1.5k
- SFRU5 96.50c, traded for 6.5 in 1.5k.
- SFRU5 95.87^, traded for 36 in 5k.
- SFRJ5 95.87/95.75/95.68p fly 1x3x2 with SFRK5 95.81/95.68/95.62p ladder 1x3x2, bought for 10 in 2k.
- SFRM5 95.68p, sold at 2.5 in 10k.
- 0QH5 96.00c, bought for 13 in 3k.
- TYH5 107p, bought for 11 in 15k
- TYJ5 107p, bought for 11 in 17k total.
- TYJ5 107/106ps, bought for 7 in 15k total.
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