Bond Market Update

A Fed-fueled selloff

• U.S. Treasuries weren't doing much in front of the 2:00 p.m. ET FOMC decision and release of the Summary of Economic Projections. They did a lot after that, however, with prices falling and yields rising appreciably. That dynamic followed the Fed's decision to cut the target range for the fed funds rate by 25 basis points to 4.25-4.50%, as expected, and the understanding that its median estimate for PCE and core PCE inflation was increased for 2024 and 2025 while the median estimate for the 2025 fed funds rate was raised to 3.9% from 3.4%. The latter signaled an outlook for only 50-basis points of easing versus a previous view of 100 basis points. The market seemed to be grappling with the likelihood that the Fed will be pausing its rate-cut campaign and that market rates, for all intents and purposes, are going to remain higher for longer. That notion hit securities across the curve and triggered a spike in the dollar. The U.S. Dollar Index was up 1.1% to 108.15.
• Yield Check:
  • 2-yr: +11 bps to 4.35%
  • 3-yr: +13 bps to 4.35%
  • 5-yr: +13 bps to 4.38%
  • 10-yr: +11 bps to 4.49%
  • 30-yr: +8 bps to 4.66%

• News:
  • The Federal Open Market Committee (FOMC) voted to lower the target range for the fed funds rate by 25 basis points to 4.25-4.50%. It was not a unanimous vote. Cleveland Fed President Hammack dissented in favor of leaving the target range for the fed funds rate unchanged at 4.50-4.75%.
  • The median estimate for the federal funds rate in 2025 was raised to 3.9% from 3.4%, signaling an estimate for 50-basis points of easing in 2025 versus the prior estimate of 100 basis points. The longer run rate also got bumped up to 3.0% from 2.9%.
  • The Summary of Economic Projections, released at the same time as the policy directive that said the "...Committee is attentive to the risks to both sides of its dual mandate," showed an upward revision in the median estimate for the change in 2024 real GDP (to 2.5% from 2.0%) and 2025 real GDP (to 2.1% from 2.0%), the 2024 PCE inflation rate (to 2.4% from 2.3%) and 2025 PCE inflation rate (to 2.5% from 2.1%), the 2024 core PCE inflation rate (to 2.8% from 2.6%) and 2025 core PCE inflation rate (to 2.5% from 2.2%), and a downward revision to the 2024 unemployment rate (to 4.2% from 4.4%) and 2025 unemployment rate (to 4.3% from 4.4%).
  • Government funding bill includes provision that requires PBMs to fully pass through 100% of drug rebates to health plans, according to The Hill
  • Elon Musk says that the government funding bill should not pass, according to X post
  • California Governor Gavin Newsom declared state of emergency over bird flu, but says risk the public remains low, according to CBS News
  • Senate passes $895 bln defense authorization bill; President Biden will sign it
  • Supreme Court confirms it will hear challenge to law that could ban TikTok by January 19
  • OPEC concerned about President-elect Trump's plan to increase domestic oil production, according to Reuters
  • President-elect Trump's transition team is preparing plans to lower EV federal subsidies, according to Bloomberg
  • CFPB aiming to investigate credit card reward programs, according to Washington Post
  • Canada revealed a $900 mln border security plan in order to prevent tariffs from incoming Trump administration, according to The Wall Street Journal
  • Japan reported November trade data that included better-than-expected exports but weaker-than-expected imports, contributing to the prevailing expectation that the BOJ will hold off on raising rates this week
  • The PBOC held a meeting with financial firms to discuss their aggressive trading and to emphasize the need to be aware of relevant risks, according to Bloomberg
  • Bank Indonesia held its benchmark rate steady at 6.00% and Bank of Thailand did, too, keeping its policy rate at 2.25%
  • Eurozone's November CPI -0.3% (expected -0.3%; last 0.3%) and 2.2% yr/yr (expected 2.3%; last 2.0%); Core CPI -0.6% m/m (expected -0.6%; last 0.2%) and 2.7% yr/yr (expected 2.7%; last 2.7%)
• Commodities:
  • WTI crude: +0.5% to $69.95/bbl
  • Gold: -0.3% to $2653.60/ozt
  • Copper: +0.2% to $4.16/lb
• Currencies:
  • EUR/USD: -1.1% to 1.0374
  • GBP/USD: -0.9% to 1.2594
  • USD/CNH: +0.5% to 7.3201
  • USD/JPY: +0.6% to 154.44
• The Day Ahead:
  • 08:30 ET: Weekly Initial Jobless Claims (Briefing.com consensus 237K; prior 242K) and Continuing Jobless Claims (prior 1886K)
  • 08:30 ET: Q3 GDP - Third Estimate (Briefing.com consensus 2.8%; prior 2.8%) and GDP Deflator - Third Estimate (Briefing.com consensus 1.9%; prior 1.9%)
  • 10:00 ET: November Existing Home Sales (Briefing.com consensus 4.10M; prior 3.96M)
  • 10:00 ET: November Leading Indicators (Briefing.com consensus -0.1%; prior -0.4%)
  • 10:30 ET: EIA Natural Gas Inventories (prior -190 bcf)
  • 16:00 ET: October Net Long-Term TIC Flows (prior $216.B)