In the US the Fed kept its monetary policy unchanged as widely expected, hence rates were kept at 5.25-5.50%. Powell signalled optimism on inflation but pushed back on expectations for a March cut. We stick to our call for a first cut in March followed by gradual quarterly reductions thereafter, as we think the approach still fits well with the Fed's risk management stance. Market prices in around 35% probability for the March cut. For more details, see Research US - Fed review: In a risk management mode, 31 January. On the data front, labour costs increased less than expected by 0.9% in Q4 against 1.2% in Q3. This is still on the high side for the Fed. However, it is a dovish signal since it is trending downward more than expected. The ADP report signalled signs of cooling labour market. It came in at 107K, much lower than the expected 145K and the December print was revised downwards.
Bond markets rally. Several additional factors provided tailwinds to bonds yesterday. The US Quarterly Refunding Statement showed that the US Treasury expects to slow the pace of issuance in the long end of the curve in December and January. Additionally, total issuance at next week's refunding auction will be slightly smaller than expected at USD112bn. The decline in yields gained further traction in the afternoon following the release of significantly weaker than expected Manufacturing ISM figures for October. Labour market data was mixed with ADP lower than expected at 89.000 in October (consensus 150.000), while job openings remained elevated at ˜9.5mn in September.
The Fed held interest rates steady for the second straight meeting, but retained a tightening bias, signaling that future actions will be guided by financial conditions and the trajectory of the economy.