Slow Ride, Take It Easy

February 20, 2025
6 min read

Slow Ride, Take It Easy

  • Fed in no hurry to resume easing, but prepared to pause or slow the pace of decline of its securities holdings. Treasury yields dip across the curve.
  • Watch-out today for the US weekly jobless claims data.
  • Australia’s January labor force report was surprisingly strong, supporting the RBA’s cautious guidance. AUD rallies.

USD is drifting lower against all major currencies. Treasury yields are down as the Fed is considering pausing or slowing its balance sheet run-off. USD will remain supported by its wide bond yield advantage. Tomorrow’s global February PMI readings should underscore the divergence theme favoring the US economy.

The FOMC minutes of the January 28-29 meeting confirms policymakers are in no hurry to resume easing. “Many participants” emphasized that additional evidence of continued disinflation would be needed to support the view that inflation was returning sustainably to 2%. Still, “several” participants remarked that policy could be eased if labor market conditions deteriorated, economic activity faltered, or inflation returned to 2% more quickly than anticipated.

The minutes also showed that participants generally pointed to upside risks to the inflation outlook citing “the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household spending.”

Finally, the minutes revealed that policymakers discussed pausing or slowing the pace of decline of its securities holdings because of “the potential for significant swings in reserves over coming months related to debt ceiling dynamics.” The Fed is currently allowing up to $25bn in Treasuries and $35bn in mortgage-backed securities to mature each month without reinvesting the returned principal.

Atlanta Fed President Raphael Bostic (non-FOMC voter) agreed the Fed should “be more cautious today” with its balance sheet runoff. Bostic pointed out “the debt ceiling is one factor that comes into that, but there are others as well, including how banks decide to deploy capital across their investment instruments.” Overall, slowing or pausing the unwind in Treasury holdings will weigh on yields.

Meanwhile, Fed officials continue to urge patience. Fed Vice Chair Philip Jefferson stressed “we can take our time to assess the incoming data to make any further adjustments to our policy rate” because of the US economy is strong and labor market solid. Jefferson added “Generally, households appear to be in a good position: Asset holdings are high across the income distribution, driven by high house and equity prices, and debt levels are subdued.” Strong US household balance sheet is a key factor underpinning consumer spending activity.

Today, weekly jobless claims will be of interest (1:30pm London). That’s because initial claims will be for the BLS survey week containing the 12th of the month and are expected at 215k vs. 213k previously. Recent government layoffs are a downside risk to the labor market outlook. But it’s worth noting that total federal jobs account for less than 2% of total non-farm employment.

Fed speakers today include: Chicago Fed President Austan Goolsbee (FOMC voter) (2:35pm London), St. Louis Fed President Alberto Musalem (FOMC voter) (5:05pm London), Fed Vice Chair for Supervision Michael Barr (7:30pm London), and Fed Governor Adriana Kugler (10:00pm London).

EUROPE

EUR, PLN, HUF, and CZK sold-off briefly yesterday after US President Donald Trump lashed out at Ukrainian President Volodymyr Zelenskyy. The geopolitical landscape can further weigh on EUR/USD if the EU bloc does not turn on the fiscal tap. However, there are significant constraints to deeper EU fiscal integration, Germany is one and the rise of populist parties across Europe is another.

Meanwhile, ECB/FED policy trend is an ongoing drag for EUR/USD. Markets continue to imply another 75bps of ECB cuts in the next 12 months which would see the policy rate bottom at 2.00%, within ECB staff neutral rate estimate of 1.75%-2.25%.

AUSTRALIA

AUD/USD rallies to a two-month high around 0.6380 on stronger than expected Australia labor market condition in January. The economy added 44k jobs (consensus: 20k) vs. 60k (revised up from 56.3k) in December. All the job gains were in full-time positions (54.1k) while part-time employment fell by -10.1k. The unemployment rate rose in line with consensus by 0.1pts to 4.1% as more people entered the labor force. The unemployment rate is tracking below the RBA’s 4.2% projection.

The RBA signaled it will pay particular attention to labor market development to guide future policy decision. The strong January jobs report validates the RBA’s guidance for a cautious easing path ahead. Indeed, RBA deputy governor Andrew Hauser echoed comments made earlier this week by Governor Michele Bullock, stating that he does not share the market’s confidence in the rate cut path. Interest rate futures imply less than 50bps of RBA cuts over the next 12 months that would see the policy rate bottom at 3.70%.

JAPAN

JPY is outperforming as Japan’s 10-year bond yields break higher to the highest level since November 2009. Markets imply the policy rate to peak at 1.17% over the next three years. Japan’s January CPI print can reinforce current rate hike expectations and offer JPY additional support (11:30pm London).

Headline is expected at 4.0% y/y vs. 3.6% in December, core (ex-fresh food) is expected at 3.1% y/y vs. 3.0% in December, and core ex-energy is expected at 2.5% y/y vs. 2.4% in December. If so, headline would be the highest since January 2023 and core would be the highest since August 2023 and further above the 2% target.

CHINA

USD/CNH is lower on broad USD weakness. As was widely expected, the People’s Bank of China (PBoC) left the 1- and 5-year Loan Prime Rates (LPR) unchanged at 3.10% and 3.60%, respectively. The PBoC will set its 1-year MLF rate in the next few days and is expected to keep it steady at 2.0%. Beyond the near-term, more monetary easing is the pipeline which is a drag on CNH. Chinese leaders in December said they would switch from a “prudent” to an "appropriately loose" monetary policy stance. Regardless, to escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption.

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