Dovish Fed Minutes Boost Demand for Treasuries

US Stocks fluctuated while Treasuries rallied across the curve as markets digested yesterday’s release of the January FOMC minutes and incoming economic data.  The tone of the minutes were extremely dovish and revealed Fed policymakers were concerned about a number of developments both domestically and internationally.  Some of the committee’s concerns were increased financial market volatility, wider credit spreads, a stronger dollar, falling inflation expectations, and running out of monetary ammunition to fight against an economic downturn, among others.  The minutes observed that “the effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy”.  In other words, tighter financial conditions reduce the need for the Fed to continue its move towards monetary policy normalization at this time.  To this point, St. Louis Fed President Bullard said yesterday in a speech to the CFA Institute that it would be “unwise” to raise rates right now.  This is notable because Bullard was previously one of the more hawkish committee members and he is a voting member this year.

Today’s US economic releases revealed a consistent theme: the US job market is firming, but the manufacturing sector still faces headwinds.  The number of Americans filing for jobless claims benefits unexpectedly declined last week to 262,000, the lowest level since November.  The four-week moving average, a less volatile measure of labor market trends, fell 8,000 to 273,250 last week.  Claims have now been below the 300,000 threshold (which is consistent with a firming labor market) for 50 straight weeks, the longest stretch since the early 70s.  A separate report showed factory activity in the mid-Atlantic region contracted (albeit at a slower pace than expected) due to declines in new orders and employment.

Also on tap today, San Francisco Fed President Williams (hawk, non-voter ’16) is scheduled to speak at 3:30pm ET and there is a $7 billion 30-year TIPS auction at 1pm.