FED: BofA, Goldman Tweak QT Views On Fed Minutes (1/2)
Analyst expectations for Fed balance sheet runoff have been reassessed after the January FOMC minutes surprisingly noted that "various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff" due to the ongoing debt limit constraints on Treasury issuance and the swings that it is likely to generate in reserve balances. It seems that consensus remains for QT to halt toward the end of Q3 (recall this consensus has been pushed back from mid-year as reserves have remained elevated), with consensus for the Treasury hitting the "x-date" under the debt limit remaining at around August.
- Most notably, BofA's expectations for the QT timeline have changed: they now expect a "pause" in QT to be announced at the March Fed meeting, with implementation in April and a halt to QT altogether after the debt limit is resolved ("most likely in July / August"). The impact of this is to reduce net Treasury supply by $150B in calendar year 2025 vs their previous baseline of QT ending in September. "How could Fed surprise? At least two ways: (1) slow QT, not pause it: we see this as unlikely since the Fed has already slowed QT once & is likely worried about over-draining reserves. If QT were further slowed, we think it most likely that USTs would be fully reinvested while MBS continue re-paying. (2) restart QT after DL: it could happen if money market pressure is milder than we expect post DL resolution."
- Goldman Sachs now see the Fed discussing slowing runoff in March, with QT slowing in May (vs June previously), and runoff to end at end-Q3 (unchanged). This would be "in line with how the FOMC has approached changes to balance sheet policy in the past. "
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DUTCH AUCTION PREVIEW: On offer next week
DSTA has announced it will be looking to sell E2.0-2.5bln of the 2.50% Jan-30 DSL (ISIN: NL0015001DQ7) at its auction next Tuesday, Jan 28.
GILTS: Little Change In Positioning In Futures On Tuesday, Still Feels Short S/T
OI was little changed during yesterday’s rally in gilt futures, indicating little movement in net positioning. That came after ~9.5K of fresh net shorts were seemingly set on Monday. Short-term positioning in the contract still feels net short to us.
CANADA: CIBC On USDCAD In Tariff Scenarios
- Working off a BoC study from Jul 2019, which shows a 25% sweeping tariff could be worth around 6% of Canadian real GDP, CIBC estimate that the BoC’s overnight rate could fall as low as 0.8% with 2Y yields at 1.65% and USDCAD at 1.5340.
- This is a hypothetical scenario. “Implementation hurdles, negotiation, and the high risk of retaliation in this scenario makes it little feasible that a trade war will get that far”.
- They estimate that USDCAD currently has 2.3% of Trump premium.
- Considering alternate scenarios, complete elimination of tariff risk would see USDCAD “move strictly off our Bank and our Fed call (CIBC Economics BoC: 4x 25bps cuts every meeting until June; Fed: H1 hold, 3x 25bps cuts in H2). In this case, USD/CAD hovers between 1.43-1.44 in H1 on continued headline uncertainty, before falling to 1.3750 in the back half of the year due to more aggressive Fed cuts in H2.”
- Alternatively, they run scenarios with 10% tariffs and 20% tariffs with both energy & auto carve-outs as well as just energy carve-outs. Against these scenarios, they see USDCAD peaking at 1.461 and 1.468 in the 10% case or 1.478 and 1.496 in the 20% case.
- “The market implied probability of spot moving above 1.4610 by Q2 is just over 20%; above 1.4960 is just over 10%. This implies that while high-stake tariffs are not expected to be the base case, the market has assigned a larger-than-zero chance that they can happen.”
