Overnight, the Fed kept rates on hold but the messaging is nuanced. The FOMC statement indicated that economic activity is “solid” with inflation somewhat elevated. Moreover, the risks of “higher unemployment and higher inflation” (stagflation risks) were judged to have risen. The upshot is that there is insufficient reason for the Fed to move and a period of pause (until data weakens) remains the best course of action.
The Fed will remain reactive, as opposed to pre-emptive in the current environment. Instead, it will be Trump’s policies that continue to take centre stage. Thus far no trade deals have been announced. Meanwhile, a lot of attention is placed on the upcoming China-US talks. The range of possibilities can be pretty wide, which probably accounts for the considerable Fed easing priced into USD rates.
The US Treasuries curve bull flattened. We suspect that the long end probably took comfort from data that showed the foreign demand for USTs has not evaporated. Meanwhile, the front of the curve continues to price in around three cuts for 2025 and another two cuts in 2026. Note that these cuts would only make sense if the US economy materially deteriorates over the coming few quarters. At current levels, we think that short-term USD rates look a tad low. 
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