While January headline risks were high, short-term rates, including Treasury bills, OIS and discount notes did not move much. Most of the “risk off” sentiment was felt in US Treasury 2-year and longer yields. Two-year yields started the month at 1.57% and ended at 1.38% while 10-year US Treasury yields started at 1.92% and ended at 1.55%. Libor continued to drop as demand for credit increased with year-end firmly in the rear view mirror. Three-month Libor started at 1.91% and ended at 1.76% and LIOS started the month at 0.35% and ended at 0.19%. Flows were muted.
ICI reported money market funds’ assets under management (AUM) up just $21 billion, with most of that concentrated in Prime funds, which were up $18 billion. For context, Prime fund AUM a year ago was $595 billon.
The US airstrike which killed Iranian General Soleimani was big news at the start of the month but fortunately deescalated quickly. Fed meeting minutes reported nothing unexpected: policy is appropriate, growth is in-line with expectations, there is a potential to reduce Open Market Operations and begin buying short coups.
On the data front, the headline nonfarm payroll figure came in lower than expectations at 139,000 for the month of December. Average hourly earnings came in lower than expected at 0.1% month-over-month as well, pushing its year-over-year level lower to 2.9%. The Producer Price Index and Consumer Price Index were relatively meager but the University of Michigan Consumer Sentiment Index rebounded nicely from recent lows. Retail sales also rebounded from last month’s dismal results though they weren’t exactly remarkable. Housing starts, a traditionally volatile statistic, were up big, surging to the highest level in 13 years.
The Fed Funds Effective rate continued to test the lower bound of the rates channel but the Fed did not disappoint. At the January meeting, they adjusted both the Fed’s Reverse Repo Program rate (the rate at which they borrow cash and pledge US Treasury collateral) and the Interest On Excess Reserves up by 5 basis points (bps) to 1.50% and 1.60%, respectively. Technically this is a rate hike, but should be considered more of a policy adjustment. The Fed also noted they would restrict investment in issues that they currently own 15% of in their System Open Market Account and announced a 20-year bond would be issued. There are no plans for 50-year or 100-year bonds at this time.
As the month wound down, the Coronavirus outbreak has gradually swayed market sentiment. Initially the outbreak was downplayed as a short-term set back, but as it has spread it has started showing a larger impact on the overall China economy. Markets are starting to price in worsening outcomes.
The longer end of the rates money market curve has inverted (OIS, Treasury bills and discount notes). The credit curve is still positively sloping but just barely. Three-month to 1-year Libor is +5bps. Rate expectations grow more cautious and there is now an 80% chance of a 25bps policy ease by September.