Global markets inched higher overnight as the latest Federal Reserve minutes were digested. Treasury yields edged lower, with the 10yr closing at 4.53%, as the debate on whether to pause quantitative tightening (QT) in light of ongoing debt-ceiling uncertainties continues. The 20yr auction saw weak demand, leading to a further steepening of the yield curve. Meanwhile, the US housing market showed signs of weakness, with housing starts plunging 9.8% month-over-month in January, likely impacted by unusually cold weather.
The Federal Reserve's latest meeting minutes revealed ongoing discussions about a potential slowdown or pause in its quantitative tightening (QT) program, as policymakers assess the risks posed by the government's debt-ceiling constraints. Since June 2022, the Fed has been reducing its balance sheet by allowing Treasuries and mortgage-backed securities to mature without reinvestment, a process that has already unwound over $2 trillion, bringing the total balance sheet down to $6.8tn, still significantly above pre-pandemic levels of around $4tn. Officials are now considering whether continued runoff could create disruptions in money markets, particularly as reserve balances fluctuate unpredictably. The minutes highlighted that uncertainty surrounding bank reserves and Treasury issuance may complicate the outlook for QT, with some strategists now expecting the program to end as early as September. A premature halt to balance-sheet reduction could be mildly bullish for Treasuries, as it would reduce net government bond supply. Fed Chair Powell has maintained that QT still has a way to go, so let’s see how this evolves.
In the UK, the forecast-topping January inflation print will make for uncomfortable reading for the Bank of England, but it’s unlikely to set off alarm bells. Headline CPI inflation rose to 3% in January from 2.5% in December, exceeding expectations. This was largely attributed food prices, while services inflation was cooler than expected.
Asian markets had opened Wednesday on a mixed note. Japan’s Nikkei 225 slipped 0.2%, weighed down by weakness in tech and semiconductor stocks, while Hong Kong’s Hang Seng Index gained 0.5%, supported by Morgan Stanley’s upgrade of MSCI China to "equal weight". Morgan Stanley has been particularly bearish on China, emphasising the argument that a big rotation out of US stocks into Asia and Europe is on. The Chinese central bank, the PBOC, is set to announce its interest rate decision later today, with expectations that policymakers will maintain an accommodative stance.
Mongolia has been a bit of a star, making financial markets history with its $500mm bond issuance, successfully refinancing its 2026 and 2028 debt, despite heightened geopolitical uncertainties and competition from three other non-IG EM sovereigns. Following credit rating upgrades from all 3 major agencies, Mongolia got 8x oversubscription, allowing it to price at a yield of 6.625%, 17.5bps inside its secondary market curve, at just +222bps over US Treasu
In commodities, oil prices edged higher as geopolitical risks kept supply concerns alive. Brent rose 0.5% to $72.18 per barrel. Copper prices, often seen as a barometer of economic health, advanced on optimism around Chinese industrial demand.
Looking ahead, investors will be closely watching today's US Philly Fed Manufacturing data and initial jobless claims, along with speeches from multiple Federal Reserve officials, including Goolsbee, Jefferson, and Barr. In Europe, ECB policymakers Makhlouf and Nagel are also scheduled to speak, providing further insight into the region’s monetary policy trajectory.
Comments