The Daily Update - Fed TBAC

For all you Star Wars fans out there ‘May the 4th be with you’.

Last night as widely anticipated the Federal Reserve FOMC unanimously kept its policy settings unchanged leaving the Fed Funds upper rate at 1% adding “the committee views the slowing in growth during the first quarter as likely to be transitory” and “near-term risks to the economic outlook appear roughly balanced”. The statement also noted that “inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective” and “household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid”.

The futures pricing of the 14 June FOMC meeting rose to an 88% probability for a rate hike, up from around 70% before the announcement. We agree with the market and think it's odds on that the committee will raise the Funds rate by a further 25 basis points next month even though we have a whole month’s worth of data between now and the next Fed meeting on June 14th even though recent inflation releases have been lower than market expectations.

Also hitting the headlines in the US was the announcement by the Treasury Borrowing Advisory Committee (TBAC) that the idea put forward by Donald Trump appointed Treasury Secretary Mnuchin to issue 50 and 100 year debt had little support. The panel did however suggest the issuance of twenty year debt could have some merits and would take the pressure off the current issuance in ten year notes and thirty year bonds.

The TBAC is made up of so called ‘pillars ‘ of the financial world, mutual funds, fund managers, banks, and also hedge funds, is governed by federal statute, and meets quarterly with the Treasury Department. The Borrowing Committee presents their observations to the Treasury Department on the overall strength of the U.S. economy as well as providing recommendations on a variety of technical debt management issues.

The long bond outperformed on the news with a fall in yield while the remainder of the curve moved a little higher following the rise in expectations for a June rate hike. The market will now look forward to tomorrow's Nonfarm Payrolls data with expectations for a 190k gain in jobs and a slightly higher unemployment rate of 4.6% and average hourly earnings to edge up 0.3% but stable at 2.7% year-on-year.