The Fed has kept the funds rate steady at 4.25% to 4.5% since December. The threat of a trade war and the increased risk of a sharp price jump have ensured Fed caution over further rate cuts. The FOMC dot plot below shows four participants expect no cuts this year, another four expect one cut of 25 basis points, and eight more expect a total of 50 basis points.
FOMC projections identify rising uncertainty over GDP growth and greater risk of an undershoot.
Consumer expectations of inflation soared in the March University of Michigan survey, with the median price increase in the next year jumping to 4.9%.
Expectations of future conditions fell sharply to 54.2.
Stocks were buoyed by Fed Chair Jerome Powell’s view that tariff-driven inflation will be “transitory” and largely confined to this year. (Reuters)
The Dow Industrial Average rallied to test resistance at the former primary support level of 42,000.
The S&P 500 recovered some ground but encountered resistance at 5700, below the former primary support level.
Long-term Treasury yields benefited from the outflow from equity markets in February and March, with the 10-year testing support at 4.1% before increasing to 4.25%. A further fall in stocks would likely cause a short-term softening of UST yields.
Upward pressure on US Treasury yields will likely come from doubts over the current administration’s economic strategy and concerns over a debt-ceiling stoush. US credit default swap spreads (CDS) have increased by 200% since December.
A sharp upturn in the Chicago Fed National Financial Conditions Index warns of tightening financial conditions, with credit spreads widening.
The Fed confirmed they will reduce the monthly redemption cap on Treasury securities from $25 billion to $5 billion. This will slow the withdrawal of liquidity from the Treasury market through the QT program.
Conclusion
The Treasury market has shown that it is still vulnerable to thin demand and requires Fed support to maintain liquidity in the long-term end of the curve. The Fed has been forced to cut monthly QT for Treasury securities to $5 billion. At the new rate, it would take the Fed more than 70 years to shed its present holdings of $4.24 trillion.
Stocks are rallying but are unlikely to reverse the recent bear market signal.
Acknowledgments
- Federal Reserve: FOMC Press Release
- FOMC: Summary of Economic Projections
- Reuters: US political brinkmanship undermines Treasuries’ safe-haven status
- University of Michigan: Survey of Consumers
- Federal Reserve of St Louis: FRED Data
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.