Introduction

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 IAN.lyN.GEN at BMO.com 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 starting. In the week just past, the primary theme in the treasury market was settling into a post-FOMC trading range. We now have 10-year yields comfortably between 4% and the 435 support that has held several times. Embedded in the range trading theme is that we're going to see a period of consolidation ahead of the next two major data events, one being in the form of the April 5th release of March's payrolls data, and then obviously followed by April 10th's release of March's CPI report. Volatility is clearly on the decline. This is evidence in both the move index as well as the VIX, and this is very much in keeping with the recent messaging from Powell. Specifically, the Fed has shifted into a mode that we are characterizing as more time dependent than data dependent per se. This implies that the onus is now on the economic data to dissuade the Fed from cutting in June. Otherwise, the Fed will be content to reduce policy rates by 25 basis points of the June meeting followed by a September cut and a December cut. That's currently our operating assumption for the rest of the year, contingent of course on the next three CBI prints, that's data from March, April, and May, all of which will be in the hands of monetary policymakers by the time they decide at the June meeting. Unnotable development in the week just passed came from comments from Bostik who noted that he only expects one rate cut in 2024. Now, we'll caution against interpreting too much from this observation. If for no other reason, then Bostik has historically been one of the more hawkish leaning members on the committee. Nonetheless, it did start conversations about what happens in the event that inflation doesn't ultimately conform with what the Fed would like to see. Our take is that the highest risk of stagflation being problematic for the Fed was really at the beginning of 2023. Now that enough progress has been made on the inflation front, even if the last mile to get back to that 2% inflation target ends up being more difficult to achieve than the Fed would like to see, monetary policy is still in a position where if there were an unanticipated spike in the unemployment rate or a material downshift into a negative growth profile for the US economy, the Fed would be reasonably well positioned to respond. To be fair, we've been impressed with the resilience of the real economy and continue to observe that in a more typical environment, one would have expected a spike in the unemployment rate to have already occurred. Now, to be fair, at 3.9%, the unemployment rate is half a percent off of the cycle low. And from here, we're biased to see that increase further. Returning to the observation about the Fed being faced with a potentially stagflationary outcome, we think that it ultimately comes down to how quickly the economic outlook turns. A sharp decline in demand and hiring would intuitively be disinflationary going forward, and that would allow the Fed to respond with deeper cuts. A more challenging scenario for the Fed would be a more gradual increase in the unemployment rate combined with sticky inflation, because in that scenario, the 75 basis points worth of rate cuts will be viewed by investors as responding to the slight weakness in the real economy and therefore used as evidence that the Fed is more comfortable allowing inflation to run above its 2% target for an extended period of time. Now this isn't our base case scenario, given that we expect inflation to return to the trend that was in place in the second half of last year. Nonetheless, conversations regarding sticky inflation have been very front and center over the course of the week just passed.

Dancing in the Range

Macro Horizons

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