1Teresa Ho AC (1-212) 834-5087teresa.c.ho@jpmorgan.comJ.P. Morgan Securities LLCPankaj Vohra (1-212) 834 5292pankaj.x.vohra@jpmchase.comJ.P. Morgan Securities LLCHolly Cunningham (1-212) 834-5683holly.cunningham@jpmorgan.comJ.P. Morgan Securities LLCNorth America Fixed Income Strategy23 February 2024J P M O R G A N•The discussion on QT in the January FOMC minutes was brief, suggesting the Fed is in no hurry to start the QT taper process anytime soon, even if it�s prudent on the part of the Fed to begin discussions about its eventuality•Indeed, conditions in the short-term funding markets have remained stable. SOFR didn�t experience upward pressure at January-end and trended lower this month•Furthermore, it�s likely that the rapid decline in ON RRP balances will stall out over the coming weeks in response to net T-bill supply turning negative in late March/early April and MMF AUMs remaining elevated. Both factors bias the need for increased ON RRP usage. Balances might linger around $500bn in the coming months•We are pushing back the timing of a QT taper announcement from March to June•We estimate ON RRP balances will hit $300bn in December, a threshold we believe the Fed wants to maintain to effect smooth functioning in the money markets. If we�re right, this means QT will continue through 2024, leaving $3tn of reserves in the banking sys-tem by the end of the year•The biggest risk to our QT forecast is the April tax date given potential for a TGA surge, which could prompt a large drain in reserves•Near-term catalysts: 4Q second real GDP (2/28), Jan personal income (2/29), Jan JOLTS (3/6), Feb employment (3/8), Feb CPI (3/12), Feb retail sales (3/14)Market commentarySince we last published a fortnight ago, the rates curve bear flattened, with 2yr yields up by 20bp, in response to the latest round of economic data and Fedspeak. On data, the January inflation report came in hotter than anticipated, with core CPI up by 0.4% (consensus 0.2%), marking the largest monthly gain since April 2023. Similarly, the PPI reading for January also witnessed firming, with the PPI ex-food and energy moving higher by 0.5% (see US Weekly Prospects, M. Feroli, 2/16/24). With respect to employment, the labor markets con-tinue to demonstrate resiliency with initial claims surprising favorably, dropping from 213k to 201k during the week ending February 17, which is on the lower end of the spectrum when compared to recent months (see US: Initial claims beat expectations, D. Silver, 2/22/24). The strong reading on inflation and sustained labor strength have resultingly contributed to a significant decline in market rate expectations. Currently, OIS forwards are pricing in 82bp worth of total cuts for 2024, compared to 112bp two weeks ago and 169bp in mid-January, with the first potential cut now being pushed back to June (Figure 1OIS forwards ...
