ECB VIEW: ABN Amro - Debate On Neutral To Become A Moot Point
Mar-05 21:15
- A 25bp cut on Thursday “would leave the policy rate at 2.5%, which is at the upper bound of the nominal range of the most up to date neutral rate estimates (1.5-2.5%*) [although they refer to Brand, Lisack and Mazelis research which notes a 1.75-2.25% range].
- There are opposing views on the level of neutral rates although “many of the centrists on the Governing Council seems to be comfortable with an eventual end to rate cuts at around 2%.”
- However, “this debate will most likely become a moot point. It would be something of a minor miracle if, in a world of such geopolitical and economic uncertainty, the economy, inflation and therefore interest rates would all just calmly return to equilibrium levels. Indeed, in reality, significant upcoming shocks are likely to take us to areas that are far from ‘normal’.”
- ABN Amro see the deposit rate going to 1%. “While tariffs will be clearly inflationary for the US economy, we think that they will prove to be disinflationary for the eurozone.” “When it comes to fiscal policy, it is too early to have much of a picture of the magnitude of extra spending. However, the nature of defence expenditure means it might be spread out, while the growth effects would be offset if a lot of the defence equipment is imported.”
- They have pencilled in a short pause in April, to be “followed by subsequent rate cuts from June”, but they “don’t have much conviction” on the timing of a pause.
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USDCAD TECHS: Northbound
Feb-03 21:00
- RES 4: 1.5000 Psychological round number
- RES 3: 1.4948 High Mar 2003
- RES 2: 1.4814 High Apr 2003
- RES 1: 1.4793 Intraday high
- PRICE: 1.4592 @ 16:51 GMT Feb 3
- SUP 1: 1.4546 Low Feb 3
- SUP 2: 1.4395 20-day EMA
- SUP 3: 1.4284 50-day EMA
- SUP 4: 1.4261 Low Jan 20 and a key support
USDCAD traded sharply higher Monday, before fading into the close. The initial climb reinforces and strengthens current bullish conditions. The break higher has confirmed a resumption of the uptrend and sets the scene for a climb towards 1.4814 next, the Apr 2003 high. Moving average studies remain in a bull-mode position highlighting a dominant uptrend. Initial firm support to watch is 1.4395, the 20-day EMA.
US TSYS/SUPPLY: Tsy Cash Level Assumptions Subject To Downside In Reality
Feb-03 20:52
To put Treasury's new financing projections into context, the Jan-Mar borrowing requirement of $815B would be the largest (nominal $) of any Q1, even though the financing requirement of $520B is not as high as the $656B in Q1 2023. The difference between the two dynamics is due to the large drop in the cash balance in Q1 2023 ($269B), compared with the anticipated cash raise of $128B in that quarter.
- As for why Treasury sees such a sharp drop-off in Apr-Jun borrowing, to $123B - along with a financing need that is negative (-$20B) - it's not that unusual. Q2 2024 saw a $234B borrowing requirement on a net negative financing need (-$9B), with Q2 2022 similar.
- As such it's probably the case that Treasury is expecting a bumper tax take in April 2025 (though it's hard to know for sure). It also suggests that even if this proves ambitious, the risks to actual marketable borrowing vs the projection are probably to the downside, given the cash level at end-Q2 is likely to be lower than the projected $850B. Those $850B figures should be considered placeholders given that they don't reflect the likelihood of cash being drained so long as Treasury is confined by the debt limit that is currently in place.
- We may get a better sense of Treasury's current thinking on the debt limit in Wednesday's refunding announcement.
Overall the release reflects the fact that there is a new Treasury Secretary and regime in town, and that may also be influencing the relatively benign outlook for borrowing - here's the economic outlook in this quarter's Economy Statement for the Treasury Borrowing Advisory Committee, which notably highlights that the Trump administration looks to reduce deficits:
- "Although data have suggested American economic resilience, the economy largely has been propped up by government largesse. While labor markets appear strong, job growth has been predominantly limited to industries subsidized by the public sector... As the Administration implements its agenda of slashing regulations, lowering the joint burdens of high inflation and high taxes, and freeing capital by reducing federal deficits, the private sector is primed to be the driving force of the next great economic expansion."
- Versus November's refunding: "The American economy remains strong, with a healthy labor market and easing inflation. Just a few years ago, economic forecasters did not expect that such a combination of persistently strong growth and moderating inflation was likely—or, among many cases, even possible. But over the past three years, the Biden-Harris Administration has made significant investments to reduce costs, boost economic potential, and make our economy more resilient to risks. The outperformance of the American economy thus far in 2024 shows these investments are paying off."
US TSYS: Mexico Scores Tariff Delay, Canada & China Negotiations Ongoing
Feb-03 20:49
- Treasuries look to finish mostly higher Monday, curves twisting flatter with short end rates under pressure as projected rate hike pricing through mid-year cools. Markets reacted positively midmorning to headlines that Pres Trump agreed to delay 25% tariff on Mexico, negotiations on Canada & China ongoing but expected to begin tomorrow.
- Well off early overnight low of 108-21.5, the March'25 10Y contract trades 109-00 (+5) after the bell vs. 109-15.5 high - briefly through initial technical resistance of 109-10.5 (50D EMA) with focus on 109-31 (High Dec 18); the 2Y contract -1.25 at 102-24.75; 2s10s -5.988 at 27.761.
- Stocks pared losses on the news, the DJIA trading in the green briefly (44,594.54) before receding ahead anoth heavy earnings announcement docket this week.
- FX markets have been extremely volatile Monday, with the initial likely implementation of tariffs prompting a broad strengthening of the greenback, and particular pressure on the Mexican peso and the Canadian dollar. Despite the headlines being Mexico centric, similar price action saw USDCAD almost reverse the entire gap to last Friday’s close, hitting a pullback low of 1.4546 from session highs of 1.4793.
- Tariff negotiations with Canada and China ongoing, while data focus turns to this week's CPI, PPI and January employment report this Friday.
