Nervy Fed vigil almost over

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

World turning hawkish?

U.S. stocks, bonds and the dollar held relatively steady on Tuesday as investors braced for the Federal Reserve's policy decision on Wednesday, while surprisingly hawkish remarks from Australia's central bank governor rocked markets there. 

More on that below. In my column today, I look at a potential wild card from the Fed on Wednesday - large-scale bill purchases of $45 billion a month to make sure bank reserves remain ample and there is no risk of a repo market freeze and spike in interbank rates like there was in September, 2019.

Data refreshes every time you open this email. For more U.S. market news, click here. Please send any feedback to morningbid@thomsonreuters.com.

The signals from major central banks are, by and large, becoming more hawkish, with RBA Governor Michele Bullock and ECB Board Member Isabel Schnabel this week the latest policymakers to signal an end to the global easing cycle is in sight.

A "hawkish cut" from the Fed on Wednesday is widely expected too. If delivered, U.S. and other bond yields could accelerate their recent upswing and break into new, higher ranges, laying the ground for more volatile markets going into the new year.

Shares in Nvidia reversed a 2% rise in pre-market trading and closed lower on Tuesday, following strong opposition to the Trump administration's decision to allow Nvidia to ship its second-most advanced AI chip to China.

President Trump said on Monday he would allow H200 sales to China. The US would collect a 25% fee on such sales, and AMD and Intel would get approval to sell similar chips there too. But China hardliners and Democratic lawmakers slammed the move, saying Beijing could harness the technology to supercharge its military and ultimately bankrupt and replace Nvidia. 

The U.S. Treasury's $39 billion sale of 10-year bonds on Tuesday was a reminder that appetite for U.S. sovereign debt remains strong and widespread across the investor base. At the right price, of course. 

According to Exante Data, the bid-to-cover ratio of 2.55 was among the highest of the past 50 auctions. End-user demand, which combines both indirect and direct bids, was also well above average - the 10-year yield's spike this week to a three-month high of 4.19% was clearly deemed attractive.

The Federal Reserve is widely expected to trim interest rates on Wednesday, but if Chair Jerome Powell wants to give markets an added holiday surprise, here's one option: about $45 billion of monthly short-term bill purchases.

That's the out-of-consensus call from Bank of America's rates strategists. They agree that a quarter-percentage-point reduction in the Fed funds target range to 3.50%-3.75% is likely. They also reckon the Fed will announce it will start buying large quantities of Treasury bills in January to maintain "ample" reserves in the banking system and avert the kind of liquidity crunch that froze money markets in September 2019. 

Bank reserves peaked at $4.27 trillion in 2021, and have recently fallen as low as $2.83 trillion. 

To be clear, these so-called "Reserve Management Purchases" (RMP) would not be quantitative easing. 

That refers to central bank purchases of government bonds to lower longer-dated yields and stimulate lending. Crucially, QE is usually conducted in an economy where deflation is a greater threat than inflation, and when interest rates are at or near zero.

The RMP operation that BofA envisages doesn't meet any of these criteria. It would be designed to manage money market liquidity, ensuring the plumbing of the interbank market doesn't suddenly clog up and imperil the functioning of the financial system.

Find ROI on the Reuters website, and join the debate on LinkedIn and X.

Trading Day is sent every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.

Want to stop receiving this email? Unsubscribe here. To manage which newsletters you're signed up for, click here.

This email includes limited tracking for Reuters to understand whether you've engaged with its contents. For more information on how we process your personal information and your rights, please see our Privacy Statement.

Terms & Conditions