Powell Keeps Bonds Bid ahead of GDP

The Fed cracked open the door to cutting rates later this year by emphasizing that the central bank is determined to avoid the kind of low inflation that's plaguing several developed countries. The dovish tilt dragged yields lower to as far as 10-yr barely 1 bp over the 2yr.  The implied odds of a cut this year rose afterwards while the dollar edged lower. A close decision from the BoE is due at noon GMT, followed by the first reading for US Q4 GDP is up at 13:30 GMT. A new trade was issued after Powell's press conference, with the rationale for the trade detailed in a special bilingual Premium video below.

Powell said the Fed is “determined to avoid” the downward spiral in inflation and inflation expectations that's plaguing the BOJ and ECB. The implicit message is that they will cut if there's any stumble in growth. He also offered more hints that the Fed will move to a 'make up' strategy on inflation where they would let it run hot to counter periods of below-target inflation.

In the statement, the Fed also downgraded the assessment of household spending to 'moderate' from 'strong' in a sign that risks are tilted to the downside.

The overall message continued to be that the Fed was comfortable with rates but he acknowledged that coronavirus was a risk. The implied odds of a cut in March rose to 11% and they continue higher from there with a cut now fully priced in by September (compared to 77% a day ago).

In terms of market moves, US stocks finished slightly lower as they gave up gains late but the stand-out move is the fall in Treasury yields. The US 10-year note yield fell 6 basis points to the lowest close since April and is now just 1.3 bps from inversion with the 3-month bill. The disconnect between stocks and bonds can't last and USD/JPY is stuck in the middle as it trades at the midpoint of the three-month range.

The day ahead features the first look at US Q4 GDP and the consensus is for 2.1% q/q annualized growth. A sub-2% number would reignite growth fears but also be wary of risk aversion in the final hours of trading as investors shy away from weekend coronavirus risks. The BoE is also due--Ashraf details a 2-pronged trade strategy for GBPUSD ahead of the decision in Tuesday's Premium video.