The economy does not meet expectations
At the beginning of the year there were many optimism around. The economy is in a decent condition and his hope is that President Trump will enter and Turbo collects the story of growth with tax cuts and deregulation. When combined with tariffs that have the potential to improve inflation and immigration control market, feeling the federal reserve will have less scope to cut the tariff. New February 12, the financial market only gives a price of one interest rate of 25BP interest rates for the coming year.
However, it turns out that the initial priority of President Trump was the cutting of government spending and trade protectionism. This has increased concerns about work slaughtering, not only for federal government workers, but also has the potential among millions of private sector contractors employed in the government sector.
The use of tariffs, which may increase significantly when President Trump is trying to end manufacturing activities, increase concerns about the potential price increase that injures the power of consumer expenditure and fear among companies that higher input costs can suppress profit margins. The reciprocity rates from foreign governments and consumer boycotts will then add problems for US exporters. The result has become a weaker sentiment and shopping.
But Fed is still not in a hurry to cut further tariffs
Disappointing economic data and President Trump did not show signs of swaying in his commitment to this policy had caused the equity market to take a dim view of economic prospects. Although this is not our basic case, recession talks are increasing. Chairman of Powell is likely to shrink the fear in a post-meeting press conference. In his speech on March 7, he stated that “Despite the increased level of uncertainty, the US economy continues to be in a good place.” He described the growth and number of labor markets as “solid” and temporarily recognizing weaker consumer trust prints, he argues that “Sentiment reading has not been a good predictor for consumption growth in recent years”. Because of that “We don’t need to be in a hurry [to alter monetary policy]and positioned well to wait for greater clarity. “
Therefore we hope Fed to maintain their estimates from December and indicate that their basic cases remain two levels of 25BP level this year. There is no urgent need for cutting additional interest rates considering that unemployment and inflation are still tracking heat and it is likely to remain above the target for the rest of this year given the encouragement of tariffs. However, the prospect of growth is cooling and pressure for Fed to offer more support to the economy is likely to grow. We hope that the new tenant rental will be translated into a lower CPI housing inflation mold at the end of 2025 and this must reduce the threat of inflation from tariffs. This must give a fed space for cutting interest rates in September and December with a transfer of 25BP third in March next year.
Treasury will have a sharp focus on the path for quantitative tightening
After the last FOMC meeting, the Chairperson of Powell was asked a question about Quantitative Tightening (QT). He read what looked like a statement prepared, basically did not say any materiality. But then the next treatise shows that the path for QT is actually the point of conversation among the committee members. So it should be, as in our number, the continuation of QT at the current speed is likely to see bank reserves integrated with US $ 3TN in mid -2025.
That the US $ 3TN area is close to 10% of GDP and is considered a kind of floor that Fed prefers not to get too much. The last time The Fed did QT, they took bank reserves to 7.5% of GDP, and had market liquidity problems at that time, because they were too far. There is an argument that says 9 % of GDP may do it, but however we will see moving to the one digit region as % of GDP as a point where Fed will objection to QT, fully.
For treasuries this is important, because once QT ends, The Fed will be a regular buyer of treasuries. With US $ 50 billion to US $ 100 billion which launches the curve every month, the Federal Reserve will buy that number in the market to maintain the current ownership of treasuries. At the last FOMC meeting they widely agreed to invest in accordance with the distribution of debt capitalization in circulation. This means they will buy right along the curve.
Although it has an impact, we should not be too carried away. It will not be determinative for direction. Instead, he returned us to ‘norms’ where Fed was a constant ‘market participant’ because it manages its reserve obligations on an ongoing basis. This, the tone of points and chairman of Powell is a big problem for treasury. Maintaining the two points, plus QT projected to relax, will support. But the possibility is balanced with tariff projections regarding inflation.
FX: Risk of Reverse Events for Dollars
As above, if the chairman of Fed Powell succeeded in curbing in some fear of the recession and brought the market price back to only two Fed 25BP cuts this year, then the dollar could bounce. Does the US stock market want it to still have to be seen, but overall we can see the dollar enjoying simple recovery against the G10 this year-said Scandi’s currency, Japanese Yen and even against Euro which was recently declared again.
The softer US activity and the re-price of the Dovish 50BP this year in the Fed 2025 Cylus has become a major driving factor in the EUR/USD rally-of course, of course, as a more loose fiscal policy prospect in Europe. So let’s see whether US data that is less disturbing or confidence can help the dollar find a kind of floor.
Source: Ing
