MNI (NEW YORK) - EXECUTIVE SUMMARY
US TSYS: Bull Steepening As Fed Muses On QT End
The Treasury curve leaned bull steeper Wednesday.
- Futures started on the back foot in a continuation of the bearish price action following last Friday's post-retail sales peak, with developments in Europe (hawkish ECB member commentary, mixed UK inflation data) weighing.
- But Tsys would reclaim ground largely in two moves: first around the equity cash open, through no particular trigger (data including housing starts were soft but overall mixed), and second after the release of the January FOMC minutes which suggested that some participants eyed a precautionary end to QT earlier than markets are anticipating.
- Conversely, the 20Y Bond auction tailed by 1bp, a return to weak form after a strong prior sale in January - the Treasury market reaction was negative but brief (half a tick lower in TYs).
- With Fed cut expectations ticking higher (about 3bp for 2025), the belly of the curve outperformed. Latest cash levels: The 2-Yr yield is down 3.8bps at 4.2676%, 5-Yr is down 3.9bps at 4.363%, 10-Yr is down 2.2bps at 4.5288%, and 30-Yr is down 0.5bps at 4.7607%. In futures, Mar 10-Yr futures (TY) up 4.5/32 at 108-31.5 (L: 108-21.5 / H: 109-00)
- Looking ahead, Fed's Jefferson speaks after the cash close (subject: household balance sheets).
- Thursday's schedule includes the Philly Fed manufacturing survey alongside weekly jobless claims, while the highlight of the Fedspeak schedule is St Louis's Musalem.
NEWS
FED (MNI): Federal Reserve officials indicated they are content to keep interest rates on hold for the foreseeable future, particularly given upside risks to the inflation outlook and policy uncertainty from Washington, according to minutes from the late January meeting released Wednesday. "Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate," the minutes said. In discussing the outlook for monetary policy, participants observed that the Committee was well positioned to take time to assess the evolving outlook for economic activity, the labor market, and inflation, with the vast majority pointing to a still-restrictive policy stance."
FED (MNI MARKETS): The first thing that stands out in the January FOMC minutes was the surprising amount of balance sheet discussion, considering there was little said at the meeting press conference or indeed since then by participants. This appears to have been a modest surprise to markets as well: 10Y Swap spreads widened by about 2bp after the minutes release.
US-CHINA (MNI/NYTIMES): NYT reports that according to current and former White House officials US President Donald Trump is looking at the potential for a new trade agreement with China. NYT: "Mr. Trump has expressed interest in a deal that would include substantial investments and commitments from the Chinese to buy more American products". The article claims that alongside trade talks, Trump would also look to discuss major geopolitical and security subjects such as nuclear weapons in face-to-face meetings with Chinese President Xi Jinping.
US (MNI): US President Donald Trump has issued a statement on Truth Social endorsing the House of Representatives in its showdown with the Senate over the optimum strategy to legislate the Republican agenda. Trump: "The House and Senate are doing a SPECTACULAR job of working together as one unified, and unbeatable, TEAM, however, unlike the [Senate Budget Committee Chair] Lindsey Graham version of the very important Legislation currently being discussed, the House Resolution implements my FULL America First Agenda, EVERYTHING, not just parts of it! We need both Chambers to pass the House Budget to “kickstart” the Reconciliation process, and move all of our priorities to the concept of, “ONE BIG BEAUTIFUL BILL.” It will, without question, MAKE AMERICA GREAT AGAIN!"
US-RUSSIA (REUTERS/MNI): Reuters reporting comments from Russian President Vladimir Putin on yesterday's US-Russia diplomatic summit in Riyadh, Saudi Arabia. Putin said the purpose of talks "was to increase trust" noting that a resolution of the war in Ukraine is "priority" for Russia. Putin says that the delegations "discussed energy", notable considering the presence at the meeting of Russian Direct Investment Fund (RDIF) head Kirill Dmitriev, who told reporters the meeting covered some “specific areas of cooperation,” including "joint projects in the Arctic.”
US/G20 (MNI/NYTIMES): The New York Times reportsthat US Treasury Secretary Scott Bessent is expected to skip a G20 summit of finance ministers and central bankers in South Africa, next week. Should Bessent decline to attend the conference, it would forgo a key opportunity for Trump's Treasury team to meet with counterparts from China, Russia, India, and Brazil. Skipping the meeting appears to signal that the Trump administration sees little value in the kind of multilateralism championed by the G20.
CANADA (MNI): Canada’s response to any U.S. tariffs will be restrained by the high cost of escalation, with officials focusing instead on boosting domestic growth by reviving stalled projects like energy pipelines, industry leaders told MNI. Any export tariff "just punishes our industry, makes us less competitive," Mining Association of Canada president Pierre Gratton said in an interview.
NORWAY (MNI INTERVIEW: Economic projections that serve as a basis for ongoing pay negotiations in Norway are likely to be little changed in the key March assessment, barring significant krone moves and changes in crude oil and other major prices, Norwegian wage settlement committee (TBU) chair Geir Axelsen told MNI.
OVERNIGHT DATA
US DATA: Residential Construction Starts 2025 On Mixed Note
The residential construction sector started 2025 off on a slightly weak note, with housing starts missing expectations - offset slightly by stronger revisions, and by permits remaining steady compared to the expected deterioration.
- Housing starts in January came in at 1,366k on an annualized seasonally-adjusted basis (1,390k expected, 1,515k prior rev from 1,499k), reversing most of December's unusually large rise (to 1,515k, with the 16.1% jump from November marking the biggest percentage gain since March 2021). Building permits meanwhile were basically unchanged at 1,483k (1,460k expected, 1,482k prior, unrevised).
- In both cases, activity levels have picked up from mid-2024 lows, but are around one-quarter below pandemic peaks.
- Both multi-unit and single family residential construction contributed to the pullback in starts, dropping 8.4% to 993k / 13.5% to 373k, respectively. And it was likewise in permits: single family permits were flat at 996k, with multi-units up 0.2% (ie 1k) at 487k.
- Residential construction is likely to contribute to GDP growth in Q1 albeit at a slower rate vs Q4, and economists' consensus is for permits and starts to edge higher through mid-2026 with mid-2024 having represented the trough.
- But the outlook for new residential construction is mixed. On the upside, high mortgage rates and the related low existing home sales continue to drive buyer demand for new housing, particularly for single-units.
- And while the pipeline of units under construction has fallen substantially from peak (over 1,700k in 2023 to 1,409k, led by multi-family down from 1,000k+ to a 37-month low 768k in January 2025), there is still plenty coming online and permit activity appears to have stabilized.
- But as noted in the February NAHB survey, homebuilders' confidence in the outlook dimmed due to threats of tariffs on key imports including lumber and appliances - following a period of optimism on potential for a less onerous regulatory environment.
- And it's unclear whether dynamism will return to the residential sector until and unless long-end rates fall further.
US DATA: MBA Mortgage Activity Returns To Doldrums Despite Rate Downtick
The MBA mortgage application composite index fell 6.6% in the Feb 14 week on a seasonally-adjusted basis, with the level of the index dropping to 6-week lows.
- Purchase applications fell for a 4th consecutive week (-5.9%), with refinancings falling for the first week in the past three (-7.3%).
- The deterioration comes despite a small downtick in 30Y conforming mortgage rates in the last few weeks: after peaking at 7.09% in the Jan 10 week, rates have pulled back in small increments to 6.93% latest (an 8-week low).
- That's come alongside a pullback in Treasury yields, though spreads between conforming 30Y mortgages and 10Y Tsys have widened to just over 245bp from 233bp in the Jan 10 week.
- Jumbo mortgage rates have been fairly steady at around 7% since mid-December, with the conforming-to-jumbo spread moving from slight positive territory back to negative (jumbos trading richer).
- In short, mortgage activity remains extremely subdued, with few signs of life in the last 2 years outside of a brief rise in refinancings in September as Treasury yields fell in anticipation of the Fed rate cut cycle starting.
US DATA: Redbook Data Suggests January's Retail Sales Weakness Was Temporary
The Johnson Redbook Retail Sales Index rose by 6.3% in the week ending Feb 15, accelerating from 5.3% prior and bringing February month-to-date sales up 5.8% Y/Y.
- While the latter was below retailers' target of a 6.3% Y/Y rise, this is a significantly more buoyant appraisal of recent consumer activity compared with the January Census Bureau Retail Sales which saw a surprising 0.9% M/M drop (vs -0.2% consensus).
- Though as we pointed out at the time, there may have been some seasonal adjustment issues among other idiosyncratic factors at play in that sequential Retail Sales drop, with sales rising 4.2% on a Y/Y basis in January (not far off the 4.5% Y/Y increase posted by the Redbook index in January - and this has subsequently rebounded).
- Johnson Redbook sales growth has routinely exceeded that of Y/Y Census Bureau Retail Sales since mid-2024, but even accounting for that differential points to "official" retail sales somewhere in the 3-4% Y/Y area in February so far.
- A reminder of the Johnson Redbook Index's methodology: "a sales-weighted of year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. Same-store sales are sales in stores continuously open for 12 months or longer. By dollar value, the Index represents over 80% of the equivalent 'official' retail sales series collected and published by the US Department of Commerce."
US OUTLOOK/OPINION: GDPNow Steady After Construction Data
The Atlanta Fed's GDPNow estimate of Q1 2025 real GDP growth was remarkably unchanged after the mixed January New Residential Construction report: 2.3% Q/Q annualized, same as the last update on Feb 14 (both 2.34% unrounded).
- Indeed the estimate of residential investment growth in the quarter was unchanged at 1.8% (up 3bp on an unrounded basis but basically no change).
- The only category to shift was imports, which are seen growing a little more slowly (5.4% vs 5.5% prior) but with no discernable impact on the contribution of net exports to overall GDP.
- Again, a 2.3% outturn would represent no change from Q4 2024's GDP reading, albeit with notably softer consumption, stronger business investment, and renewed drag from net exports offset by inventory buildup.
MARKETS SNAPSHOT
(from spreadsheet)
US TREASURY FUTURES CLOSE
(from spreadsheet)
US 10YR FUTURE TECHS: (H5) MA Studies Highlight A Dominant Downtrend
- RES 4: 110-25 High Dec 12
- RES 3: 110-19 76.4% retracement of the Dec 6 - Jan 13 bear leg
- RES 2: 110-14 High Dec 14
- RES 1: 110-00 High Feb 7 and the bull trigger
- PRICE: 108-28 @ 16:18 GMT Feb 19
- SUP 1: 108-04/00 Low Feb 12 / Low Jan 16
- SUP 2: 107-06 Low Jan 13 and the bear trigger
- SUP 3: 107-04 Low Apr 25 ‘24 and a key support
- SUP 4: 106-11 2.00 proj of the Oct 1 - 14 - 16 price swing
Treasury futures recovered off the intraday low of 108-21+ well, keeping the price clear of the Feb 12 low. Any further reversal higher would expose key resistance and bull trigger at 110-00, the Feb 7 high. For bears, recent weakness resulted in a break of 108-20+, the Feb 4 low, signalling the end of the correction between Jan 13 - Feb 7. Moving average studies highlight a dominant downtrend. A resumption of weakness would open 108-00, Jan 16 low, and expose 107-06, Jan 13 low and bear trigger.
STIR: Implied 2025 Cuts Edge Higher After Fed Minutes
The futures-implied Fed funds path shows slightly more anticipated easing following the release of the January FOMC minutes.
- We would attribute this dovish reaction mainly to speculation that the Fed may be closer to ending QT than previously thought based on the extensive discussion on balance sheet policy in the January meeting minutes (though as we noted earlier, it seems such sentiments remain in the minority on the Committee).
- While the minutes release nudged cumulative 2025 pricing less than 1bp lower, the biggest move of the session was on headlines earlier in the session on US -Ukraine-Russia negotiations which appeared to help steer rates and equities lower.
- The first full 25bp rate cut remains priced only by September's meeting but more fully after today's moves (27bp vs 25bp prior session), with cumulative cuts for 2025 totaling 37-38bp to 3.96% (vs 35bp and 3.94% prior).
| 2025 Meeting | Current FF Implieds (%), LH | Cumulative Change From Current Rate (bp) | Incremental Chg (bp) | Prior Session (Feb 18) | Chg Since Then (bp) |
| Mar 19 | 4.32 | -0.6 | -0.6 | 4.32 | 0.0 |
| May 07 | 4.30 | -3.3 | -2.7 | 4.29 | 0.7 |
| Jun 18 | 4.20 | -13.1 | -9.8 | 4.21 | -0.7 |
| Jul 30 | 4.15 | -18.2 | -5.1 | 4.16 | -1.0 |
| Sep 17 | 4.06 | -27.2 | -9.0 | 4.08 | -1.8 |
| Oct 29 | 4.02 | -31.3 | -4.1 | 4.03 | -1.5 |
| Dec 10 | 3.96 | -37.4 | -6.1 | 3.98 | -2.3 |
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: Secured Rates See (Likely Temporary) Upside Pressure
As largely expected, secured rates saw some upside pressure Tuesday, coinciding with large Treasury coupon auction settlements from last week's refundings. SOFR rose 4bp to the highest level of February so far (4.37%), with BGCR and TGCR up 3bp.
- It's anticipated that these rates will pull back later this week as the Treasury settlement impact subsides, though pressures are likely to return at the end of the month as usual.
- Effective Fed funds unsurprisingly remained unchanged at 4.33%, though there was some upside pressure at the extreme high end of the distribution (volume-weifghted 99th percentile up 5bp to 4.45%, joint-highest since the December Fed rate cut)
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.37%, 0.04%, $2452B
* Broad General Collateral Rate (BGCR): 4.34%, 0.03%, $936B
* Tri-Party General Collateral Rate (TGCR): 4.34%, 0.03%, $913B
New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.33%, no change, volume: $89B
* Daily Overnight Bank Funding Rate: 4.33%, no change, volume: $246B
US TSYS/OVERNIGHT REPO: Overnight Reverse Repo Takeup Dips
Overnight reverse repo facility takeup dipped by $4.6B to $73.2B Wednesday, a retracement from Tuesday's $19.0B jump but still higher vs the month's multi-year low of $58.8B set last week.
- Takeup is expected to remain relatively steady until late next week, at which time it would be unsurprising to see it rise above $100B for the first time in February amid month-end dynamics.
| SOFR FIX - Source BBG/CME | ||
| 1M | 4.32021 | 0.00841 |
| 3M | 4.33003 | 0.00811 |
| 6M | 4.30668 | 0.01088 |
| 12M | 4.24548 | 0.01391 |
EGBs-GILTS CASH CLOSE: Bear Steepening With Multiple Factors At Play
Multiple factors weighed on EGBs and Gilts Wednesday.
- The space was weighed upon from overnight/early developments, including mixed UK CPI data (MNI's review of this week's UK inflation and labour market data is here), and later by supply including Gilt and Bund auctions.
- Bunds saw their biggest downside move of the day in late morning on the publication of an FT interview with ECB's Schnabel who said that the ECB is getting closer to a pause or stop in rate cuts.
- The German curve bear flattened sharply as ECB rate cuts were duly faded, though the curve re-steepened over the course of the day amid long-end underperformance.
- For a second day, losses were fairly steady throughout the session. Both the German and UK curves bear steepened, with Bunds underperforming Gilts.
- Periphery and semi-core EGB spreads widened as the recent equity rally pared back, with BTPs and GGBs underperforming.
- Thursday's calendar includes UK CBI and Eurozone consumer confidence readings, along with appearances by ECB's Nagel and Makhlouf. We also get supply from France and Spain.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 4.6bps at 2.178%, 5-Yr is up 6bps at 2.327%, 10-Yr is up 6.4bps at 2.557%, and 30-Yr is up 5.8bps at 2.803%.
- UK: The 2-Yr yield is up 3.4bps at 4.277%, 5-Yr is up 5.2bps at 4.305%, 10-Yr is up 5.3bps at 4.611%, and 30-Yr is up 4.9bps at 5.195%.
- Italian BTP spread up 3bps at 108.4bps / Greek up 1.8bps at 84.4bps
FOREX: USDMXN Rises 1% as US/Mexican Officials Discuss Trade
- The USD index is firming for a second consecutive session, with the likes of EUR and GBP underperforming in G10. Comments from President Trump on Zelensky have weighed on EURUSD, reflective of the souring sentiment towards how the potential Russia/Ukraine negotiations might progress.
- EURUSD continues to press towards 1.0400, placing weight on EURJPY (0.65%), which continues to hover near session lows as we approach the European close.
- Overall, EURJPY has pulled back from its recent high, and resistance at 160.68, the 50-day EMA, remains intact. A stronger reversal south would refocus the attention on 155.61, the Feb 10 low and a bear trigger. Furthermore, a trendline drawn from the August 2022 lows currently intersects just above this level, bolstering the significance of this area of support.
- UK inflation rose at the fastest pace in almost a year in January, outpacing even the Bank of England's expectation for a move higher. However, the small downside surprise in services inflation provided a cloudy signal for GBP, which has been dominated by broader dollar sentiment. As such, GBPUSD has slipped back below 1.2600, but overall is holding onto its recent gains.
- ZAR weakness was notable in EM amid the adjournment of the budget delivery, prompting a firm rally for USDZAR (+0.91%). This has weighed on the EM basket on Wednesday, with similar weakness being noted for the Mexican peso.
- USDMXN has risen a little over one percent on the session, to trade around 20.45 at typing. Key support at 20.1343 remains intact and the currency will remain particularly sensitive to developments in Washington, where US and Mexican officials are discussing the future trade relationship.
DATA/EVENTS CALENDAR
| Date | GMT/Local | Impact | Country | Event |
| 19/02/2025 | 2200/1700 |  US | Fed Vice Chair Philip Jefferson | |
| 20/02/2025 | 0030/1130 | *** |  AU | Labor Force Survey |
| 20/02/2025 | 0700/0800 | ** |  DE | PPI |
| 20/02/2025 | 1000/1100 | ** |  EU | Construction Production |
| 20/02/2025 | 1100/1100 | ** |  GB | CBI Industrial Trends |
| 20/02/2025 | 1330/0830 | * |  CA | Industrial Product and Raw Material Price Index |
| 20/02/2025 | 1330/0830 | *** | US | Jobless Claims |
| 20/02/2025 | 1330/0830 | ** | US | Philadelphia Fed Manufacturing Index |
| 20/02/2025 | 1435/0935 | US | Chicago Fed's Austan Goolsbee | |
| 20/02/2025 | 1500/1600 | ** | EU | Consumer Confidence Indicator (p) |
| 20/02/2025 | 1530/1030 | ** | US | Natural Gas Stocks |
| 20/02/2025 | 1600/1100 | ** | US | DOE Weekly Crude Oil Stocks |
| 20/02/2025 | 1630/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 20/02/2025 | 1630/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 20/02/2025 | 1705/1205 | US | St. Louis Fed's Alberto Musalem | |
| 20/02/2025 | 1800/1300 | ** | US | US Treasury Auction Result for TIPS 30 Year Bond |
| 20/02/2025 | 1930/1430 | US | Fed Governor Michael Barr | |
| 21/02/2025 | 2200/0900 | *** | AU | Judo Bank Flash Australia PMI |
| 20/02/2025 | 2200/1700 | US | Fed Governor Adriana Kugler | |
| 21/02/2025 | 2330/0830 | *** |  JP | CPI |
| 21/02/2025 | 0001/0001 | ** | GB | Gfk Monthly Consumer Confidence |
| 21/02/2025 | 0030/0930 | ** | JP | Jibun Bank Flash Japan PMI |