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Long Winter, No Nap - Macro Horizons

FICC Podcasts Nos Balados 01 décembre 2023
FICC Podcasts Nos Balados 01 décembre 2023
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Ian Lyngen, Ben Jeffery, and Vail Hartman bring you their thoughts on the U.S. Rates market for the upcoming week of December 4th, 2023, and respond to questions submitted by listeners and clients.


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About Macro Horizons
BMO Strategists discuss the week ahead in the U.S. rates market delivering relevant and insightful commentary to help investors navigate the ever-changing global market landscape.

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Ian Lyngen:

This is Macro Horizons episode 251, Long Winter No Nap, presented by BMO Capital Markets. I'm your host, Ian Lyngen, here with Ben Jeffery and Vail Hartman to bring you our thoughts from the trading desk for the upcoming week of December 4th. And as November fears give way to holiday cheer, we are reminded of the sage seasonal wisdom, the company holiday party is not really a party, Vail.

Each week we offer an updated view on the US rates market and a bad joke or two, but more importantly, the show is centered on responding directly to questions submitted by listeners and clients. We also end each show with our musings on the week ahead.

Please feel free to reach out on Bloomberg or email me at with questions for future episodes. We value your input and hope to keep the show as interactive as possible. So that being said, let's get started.

In the week just passed as the Treasury market return from the long holiday weekend, we saw a pretty impressive bid emerge early that pushed 10-year yields back to levels not seen in several months. The continuation of the rally that came to characterize pretty much all of November was impressive. And one of the unique aspects of the price action this week in particular was that the front end finally benefited from the bond bullish sentiment.

Now, this occurred as investors increased wagers that the Fed will be in cutting mode as early as Q1 2024. The first fully priced rate cut is May of 2024, and we maintain that that's more than just a little bit on the early side. In fact, when we look historically, if the Fed intends to keep policy rates at terminal for an extended period, it's unlikely that there'll be cutting in the first half of next year.

To some extent, what the market is saying is that they don't have confidence in Powell's resolve to avoid cutting rates sooner rather than later. Now, we're certainly sympathetic to the logic that if we do see a material spike in the unemployment rate or a significant downturn in the equity market, that will provide overwhelming evidence that the economy is slowing beyond what the Fed would like to see. Or in the case of equities, that it would trigger a tightening of financial conditions that would warrant a monetary policy response.

But those outcomes at this stage are not the base case scenario. Everything that we're seeing on the labor front continues to reinforce the notion that the jobs market remains resilient, off the highs to be sure, but certainly not a troubling trajectory to the downside.

As for the performance of risk assets, we've been impressed with how well stocks have managed to hold up rebounding off lows in part because of lower rates and the perception that the Fed will be cutting sooner rather than later. So as the Fed pushes back against this narrative, it will be interesting to see how stocks perform in an environment where Powell looks more likely than not to follow through with his commitment to retain terminal for an extended period.

We also had a couple supply events of note in the week just passed including the two and five year auctions on Monday. Twos tailed half a basis point, fives stopped through a half a basis point. Overall, we'd characterize the auctions as well received for the current environment.

Tuesday's seven year, however tailed 2.1 basis points. It's not unheard of for the seven-year tail, but that was a pretty significant tail, although it occurred at comparatively low yield levels. So we're content with the characterization of that being reflective of the existing market conditions as opposed to a vote of non-confidence for the seven-year sector.

The Fed also surely found it encouraging to see the revisions to the third quarter GDP figures. The headline growth figure was increased to 5.2% while the core PCE number was revised down to just 2.3%, an impressive cooling on the inflation front and one that really does imply that monetary policy is doing the job of reestablishing price stability.

Vail Hartman:

The final week for Fed Speak before the pre FOMC communication moratorium, saw policymakers opine on not only the prospects for another hike, but the outlook for rate cuts on the other side of the cycle.

On Tuesday, we heard from Fed Governor Waller who noted that it could take three, four, or five months for him to feel confident that inflation is really on its way down. Then we could start the conversation about lowering the policy rates.

And simply opening up the discussion to rate cuts, after Powell said several weeks ago that rate cuts weren't even a part of the discussion on the committee, instilled greater anxiety in the market that we could see rate cuts as soon as spring of 2024. However, later in the week, we saw several policymakers push back against this.

Ian Lyngen:

And Vail, you make a great observation about the fact that inflation has been cooling, but I will note that there's nothing cool about inflation, certainly not in an environment where we're coming off of decades-high levels of realized inflation and arguably a moment in which price stability came truly into question for the US economy.

Fast-forward to the middle of next year and it goes without saying that we'll be in a different environment. So while we do think that the market is too quick to price in rate cuts at this stage, the reality is that market expectations as well as Fed policy is ultimately going to be data dependent.

It's not impossible to envision a scenario in which the Fed chooses to cut rates in the first or second quarter of next year, but given the resilience of the labor market and the fact that risk assets have held in remarkably well, reinforces the messaging from the vast majority of the committee that we're at terminal but we're going to be here for an extended period of time.

And when we look back to the period when the Fed was on hold between 2006 and 2007, it's notable that that stay at terminal was about 14 and a half months. So using that as the archetype, note that policy rates were effectively at the same level, we'd look to the second half of next year to be the point in which the real conversations about rate cuts will start to pick up.

Ben Jeffery:

And along with the actual communication revealed from committee members this week, it's also worth discussing what we can glean from the size and direction of the market's response. Specifically the fact that the rally in treasuries, which began with the more modest than expected refunding announcement at the start of November and then was accelerated by first a dovish Fed than a softer employment print, and finally that cooling CPI data, all shows that after the impressive bearishness that saw 10-year yields reach 5% in October, what we now have is an investor base that is evidently eager to push the next big macro trade of the cycle, which is the bull steepening of the curve.

We saw 10-year yields get as low as 425, but more interestingly, the two-year sector touched 460 and this shows that despite a somewhat distorted positional landscape going into the second half of November, there's evidently renewed interest and capacity for the market to return to an environment where eagerly pulling forward rate cuts is the modus operandi.

So that means instead of being in the mode of selling rallies and fading steepeners, we've now inflected to a rates' paradigm where the market wants to buy dips and fade flattenings.

Ian Lyngen:

It certainly isn't wasted on us that as we reach terminal, the market is content to assume that terminal will stay in place for the foreseeable future and then start aggressively pricing in the next logical move, which in this case will be rate cuts. What's notable, however, is the fact that historically what occurs is that we see on hold priced in for, let's call it five to six months, and then rate cuts. But with the passage of time, that window of being on hold extends further and further.

So that suggests that while the market might be comfortable fully pricing in a 25 basis point rate cut for the May 2024 meeting at the moment, once we have the benefit of the next CPI and the next non-farm payrolls data, that assumption could quickly come into question.

Perhaps more importantly, assuming that the Fed cuts in the first half of next year, the market is essentially saying that the Fed's reaction function to the spike in inflation that we saw is much more dovish than what (A) the Fed had been signaling, and (B) what we saw to a far less dramatic increase in inflation during the 2003 to 2006 period.

Said differently, if the Fed is going to cut rates in the first half of next year, they're going to have spent less time at terminal than in the 2006-2007 episode and therefore not deliver the aggressive response to inflation that they have been promising.

Embedded in this interpretation is also the idea that investors have less confidence that the Fed’s actions are actually impacting the trajectory of inflation and the real economy. In fact, the market might be right and indirectly acknowledging that a lot of the inflationary pressures coming out of the pandemic did in fact conform to the Fed's characterization of them as transitory.

But what monetary policy makers got wrong was the window for the temporary pandemic-inspired factors to fully work through the system.

Ben Jeffery:

And within Waller's comments that were unquestionably the pivotal moment in the early part of the week, it was also telling to see that he didn't seem particularly concerned with the state of financial conditions.

In fact, despite the easing, we've seen since the extremes reached in the lead up to the November FOMC, Waller said in outright terms that financial conditions are still tight and still working to combat inflation. So while we had discussed the potential for the rally in the market and accompanying easing in financial conditions to actually necessitate more hawkishness from the Fed, what we've started to see play out is the opposite. A seeming comfort with the current state of restriction, both simply in policy rate terms, but also in terms of financial conditions.

And here I'll offer the observation and potential explanation for this. And what we're beginning to see in terms of the trend in the labor market data, especially relevant ahead of next week's payroll's report, in that given we know the labor market is a lagging indicator.

Even if the outright level of the unemployment rate is at 3.9%, the fact that we've started to see the trend toward greater joblessness begin means that that is marginally more concerning for the Fed than would otherwise be the case, even if a sub 4% unemployment rate is by no means a recessionary environment.

Add to this fact that this past week we saw the highest continuing jobless claims print since November 2021 during NFP Survey Week. And while no one can argue that the labor market isn't still resilient, it's not as resilient as it used to be. And that has been enough for this more concrete shift in rhetoric away from more aggressively keeping hikes on the table and instead reiterating that rates need to stay on hold where they are just for longer.

Ian Lyngen:

As a lagging indicator myself, I would make the observation that the Fed is attempting to orchestrate this downturn in the labor market, as well as a slowing in the pace of consumption. So the longer that it takes for the data to indicate the Fed has been successful in these endeavors, the more hawkish one should expect the Fed to be.

Now in the current environment, as you point out, Ben, hawkishness doesn't translate into higher policy rates. It just simply translates into delaying a rate cut for that much longer.

Vail Hartman:

And on the topic of higher for longer, investors will be receiving one more updated dot plot before the end of the year. And by not hiking in December, the FOMC will be moving the 23 dot down by 25 basis points, and this would bring the spread between the 23 and 24 dots down to 25 basis points, which means that in order to continue signaling 50 basis points of cuts next year, the FOMC would also have to move the 24 dot down by 25 basis points.

What do you guys make of the likelihood the FOMC attempts to use the dot plot as a means to push back on the recent pulling forward of rate cuts to early 2024?

Ian Lyngen:

This is a classic situation where it's tempting to sit around and debate what the Fed should do or shouldn't do. But the reality is they have been using the dot plot as a policy tool, although in some instances they have been de-emphasizing the dot plot, despite the fact that the market almost invariably trades off of the changes in the Fed's forward projection of policy rates.

I suspect that the policy calculus, as it were, pertaining to the 2024 dot, is ultimately going to come down to the next payrolls print and CPI, both of which we have before the Fed publishes the dot plot. So if we see elevated job creation and sticky inflation as a theme, that increases the probability that they leave the 2024 dot unchanged.

If we see another 0.2 or even a 0.1 month over month move in core CPI, it follows intuitively that there is a higher probability that they drop the 2024 dot by at least 25 basis points.

I'd also add that the set of potential outcomes is relatively limited at this point. They're either going to increase it by 25 basis points to make it flat from 2023, i.e. signaling no rate cuts next year, they're going to mail it in and just keep it unchanged, which means that the 50 basis points of cuts is compressed to 25 or they're going to drop it by 25.

Now, of course, one could argue they could drop it by 50 and they could drop it by 75, they could increase it by 50. But I think that at the end of the day, the Fed is going to very carefully choose how they use the dot plot in this particular episode, whereas in the past, the combination of the rate decision and press conference were more heavily weighted.

Ben Jeffery:

And away from just the dots, the SEP will also need to play catch up with the economic developments we've gotten since September and likely adjust growth inflation and unemployment rate forecasts if only given the fact that we've already seen the unemployment rate move above the end 2023 forecast at 3.8% that we got in September.

More importantly, and I think integral to the discussion around what will happen with the 2024 dot, is going to be what we'll argue is a more realistic forecast of an upward adjustment to the highs in the unemployment rate that we’ll reach in 2024 and 2025. After all, if history is any guide, the unemployment rate moving to just 4.1%, holding there for two years and then grinding back lower, is an elusive reality.

And Ian, I totally agree with you that what ultimately comes to pass will probably be a function of NFP and CPI and, of course, whatever Timiraos has to say on the topic.

Vail Hartman:

He's a voter right?

Ian Lyngen:

Might as well be.

In the week ahead, the most significant input is going to be Friday's non-farm payrolls print. We're in the Fed's period of pre-FOMC median radio silence, and there's no supply of note aside from the bill auctions.

On Tuesday, the JOLTS data will kick off the focus on jobs, followed by ADP on Wednesday, and then the Challenger layoffs report and initial jobless claims on Thursday. This will obviously be capped with non-farm payrolls on Friday where the consensus is currently slightly below 200,000 for the month of November and an unchanged unemployment rate at 3.9%.

We'll be closely watching the unemployment rate. If for no other reason, then it's now five tenths of a percent off of the cycle lows, and that has historically been followed by a spike higher. Now moving to an unemployment rate with a four handle isn't necessarily a catastrophe for monetary policymakers. Perhaps it reflects a little bit more weakness than they were anticipating at this point in the cycle, but it won't be enough to prompt the Fed into any action in the near term, certainly not on the cutting side.

We continue to assume that we'll see a Santa pause in December and we won't see a hike. But the combination of the unemployment rate and payrolls data, as well as the CPI figures on Tuesday, December 12th, will weigh heavily in how the Fed chooses to communicate its current policy bias. If we see another spike in the unemployment rate combined with a weaker than anticipated core CPI number, we would expect a more balanced pause.

If the data rebounds, we'd expect a more hawkish pause as a theme. In terms of the performance of the treasury market in this environment, yes we have been encouraged with the rally, particularly given our medium term bond bullishness further out the curve. But we do think that the front end of the market is being too aggressive in pricing in rate cuts, which means that the steepening bias which has emerged will ultimately end up being a fade.

That being said, we are very cognizant that there are many market participants who are eager to get ahead of the next trend, which will be a bull steepener and so are, in effect, pressing the trade at this moment. Said differently, while we do think that the steepening is a fade, this doesn't mean that it can't become even more of a fade in the event that the trend is extended.

Given that there seems to be limited appetite to take the other side of the trade at the moment, we're content to let the price action run with the caveat that we anticipate that sometime following the CPI report on the 12th of December, that there will be some Fed guidance offered through the financial media.

Now, while one might have reservations about the effectiveness of this channel of communication, the reality is that the Fed is employed at several times during this cycle, and we have no reason to anticipate that given the timing of the FOMC meeting versus payrolls and CPI that it will be utilized once again.

We've reached the point in this week's episode where we'd like to offer our sincere thanks and condolences to anyone who has managed to make it this far. As the holiday shopping season picks up, we wanted to quickly recap our favorite colors. I'll start.


Ben Jeffery:


Vail Hartman:


Ian Lyngen:

Thanks for listening to Macro Horizons. Please visit us at

As we aspire to keep our strategy effort as interactive as possible, we'd love to hear what you thought of today's episode. So please email me directly with any feedback at

You can listen to this show and subscribe on Apple Podcasts or your favorite podcast provider. This show and resources are supported by our team here at BMO, including the FICC Macro Strategy Group and BMO's marketing team.

This show has been produced and edited by Puddle Creative.


The views expressed here are those of the participants and not those of BMO Capital Markets, its affiliates, or subsidiaries.

For full legal disclosure, visit

Ian Lyngen, CFA Directeur général et chef, Stratégie de taux des titres en dollars US
Ben Jeffery Spécialiste en stratégie, taux américains, titres à revenu fixe
Vail Hartman Analyst, U.S. Rates Strategy

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