Another Fed Voter Urges Patience for Upcoming Rate Cuts

Rates rise despite another strong Treasury auction. Swap rates and Treasury yields closed 2-4bps higher after Richmond Fed President Barkin echoed recent sentiment from fellow policymakers, saying that “given robust demand and a historically strong labor market, we have time to build that confidence before we begin the process of toggling rates down.” Strong demand at an afternoon $25B 30y UST auction pushed rates ~3bps lower before a rebound into the close. Meanwhile, equities rose slightly after Walt Disney and Arm Holdings soared on enhanced outlooks, though the SPX failed to surpass the 5,000 psychological threshold.

CPI revisions in focus after last year’s surprise. Tomorrow, the Bureau of Labor Statistics will revise the seasonal adjustments used to calculate CPI, thus changing the last 5-years of MoM CPI data. Observers will pay close attention to tomorrow’s release after last year’s revisions of 2022 inflation figures proved significant. Fed Governor Waller said in a speech on January 16th, “One piece of data I will be watching closely is the scheduled revisions to CPI inflation…recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains.” Within last year’s revisions, core CPI increased from 0.2% to 0.3% MoM in November 2022, and climbed from 0.3% to 0.4% in December, driving 3M annualized core inflation for December to jump from 3.1% to 4.3%. Analyzing the impact of last year’s revisions on financial markets, James Knightley from ING wrote, “Rate hike expectations increased, yields rose (contributing to the 2y Treasury yield rising 60bp over subsequent weeks) and the dollar firmed.” 

BOJ points to imminent but gradual interest rate hikes. BOJ Deputy Governor Shinichi Uchida hinted today that the end of negative rates is near, but also that “Even if the BOJ were to end our negative interest rate policy, it’s hard to imagine a path in which it would then keep raising the interest rate rapidly.” Uchida emphasized the importance of avoiding “discontinuity”, and he added that the BOJ would not tighten via a sharp reduction in government bond purchases. On the other hand, he noted that it would be “natural” for the BOJ to end its purchases of ETFs and real estate investments trusts.