Market Brief: Treasury Funding Rally Fades as Event Risks Loom

CalendarJanuary 30, 2024

Sentiment is stabilizing in financial markets after a late-Monday surge that saw equity indices jump, Treasury yields fall, and risk-sensitive currencies outperform the dollar.

The rally was touched off when the US Treasury said it would need to borrow less than previously anticipated, essentially soaking up less market liquidity than had been feared. According to an updated estimate, marketable borrowing should total $760 billion in the first quarter, unexpectedly undershooting the $816 billion projected at the end of October amid higher-than-anticipated starting cash balances and an improvement in “net fiscal flows” (likely higher tax revenues). Investors remain wary however - tomorrow’s quarterly refunding announcement will outline auction sizes and the mix of instruments to be issued, with the balance between short-term bills (more easily absorbed in markets) and long-term notes (fewer potential buyers) seen as critical in determining yield behaviour.

Data out this morning showed the euro area economy flatlining in the final quarter of 2023, avoiding recession as growth in Italy and Spain helped offset weakness in France and contraction in Germany. The implications for monetary policy are mixed: on one hand, evidence of weak demand in most euro area countries should help allay inflation concerns, while on the other, a bottoming in growth trajectories might be seen as reducing the need for precautionary easing. Inflation data, due out Thursday, could help clarify the outlook - but markets already have a quarter-point rate cut priced in for April, so there’s not much room for a downward revision in expectations.

Markets might remain relatively placid today as traders avoid directional position-taking in the run-up to tomorrow’s event risks, but the session should prove informative nonetheless. A key gauge of strength in the US labour market - the Job Openings and Labor Turnover Survey - will land simultaneously with the Conference Board’s consumer sentiment survey at 10 this morning, and this evening will bring Australian fourth-quarter inflation, along with a raft of closely-watched Chinese purchasing manager indices.

Still Ahead


The ratio of open jobs to unemployed US workers likely held steady near 1.4 in December, with overall hiring levels grinding higher on continued hiring in the health care and social assistance sectors, along with a strengthening in the underlying economy. The quits rate should remain near historical averages near 2.2 percent, indicating only modest upward pressure on wages. (10:00 EDT)

With the “vibecession” now largely over, the Conference Board’s measure of consumer confidence probably continued its improvement in early January, with lower inflation and interest rate expectations helping offset signs of incipient softness in labour markets. (10:00 EDT)


The last two quarterly refunding announcements proved to be monumental, market-moving events, but this week’s iteration should come with fewer fireworks. In line with guidance provided in November, the Treasury is expected to announce an increase in notes and bonds issuance, bringing the total refunding effort to more than $120 billion without inflicting additional strain on a market still characterized by robust demand for high-yielding, safe-haven instruments. (08:30 EDT)

The Canadian economy might have staged a modest rebound at the end of 2023. Statistics Canada is expected to report an incremental 0.1-percent gain in November - according to a preliminary estimate, the manufacturing, transportation, and natural resource industries helped offset softness in the retail sector - and December’s read could look better, with higher-frequency spending data pointing to a bigger gain in household consumption. This isn’t expected to last: consumer and business surveys are pointing to renewed weakness in the early new year, with spending and investment levels likely to resume their descent. (08:30 EDT)

Wage growth may have accelerated slightly in the fourth quarter, with the Federal Reserve’s preferred Employment Cost Index ticking higher to an annualized 4.4 percent pace from 4.3 percent in the prior quarter. This shouldn’t alarm policymakers - evidence of a “wage-price spiral” has proven non-existent in the post-pandemic years, and survey data suggests that most employers expect costs to moderate in coming months. (08:30 EDT)

The Federal Open Market Committee will almost certainly leave its major policy settings unchanged for a fourth consecutive meeting, but December’s growth and inflation data could complicate the picture for forward guidance, impacting market expectations for rate cuts in coming months. With labour markets, wage gains, and overall growth continuing to defy expectations for a slowdown, language in the accompanying statement is likely to signal greater confidence in the economy’s underlying strength - something that would ordinarily indicate an underlying hawkish bias. However, with inflation falling, real rates pushing ever farther into restrictive territory, and some signs of softness emerging in the deeper recesses of the economy, officials could add sentences referring to greater “uncertainties” in the outlook, and expressing a willingness to take measures that “sustain the expansion” - wording likely interpreted by markets as telegraphing imminent policy easing. We don’t expect an announcement on slowing the pace of balance sheet reduction at this meeting, but discussion among committee members about ensuring an “ample” supply of reserves in the system could intensify, putting the conditions in place for a move in March or April - or, perhaps, in an inter-meeting announcement. (14:00 EDT)


Disinflation in the euro area likely accelerated in January as December’s year-over-year base effects faded. Markets think headline consumer price growth slowed to 2.6 percent in January from 2.9 percent in December, with the core measure slumping from 3.4 percent to 3.1 percent - a level that would put it within shouting distance of the European Central Bank’s target. A downside undershoot could boost wagers on earlier rate cuts, but we think June remains the safer bet - Teutonic influences on the central bank’s policy committee are likely to argue for a cautious approach for now. (05:00 EDT)

Markets expect a distinct dovish shift even as the Bank of England keeps all of its major policy settings unchanged for a fourth meeting. Prompted by a sharp decline in inflation pressures - projections could show price growth returning to target within the next six months, almost a year ahead of schedule - at least one official is expected to vote for a rate cut, and statement language is seen pivoting away from a tightening bias toward providing hints of easing ahead. The pound could experience an upward jolt if this doesn’t pan out however - if policymakers maintain a more hawkish footing, market consensus could shift. (07:00 EDT)


The US job creation engine probably kept decelerating in an unusually-cold early January, with fewer than 170,000 jobs added - still above population growth, but below the levels reached last year. Downward revisions in the November and December numbers could see the unemployment rate pushing higher to 3.8 percent from 3.7 percent, while putting modest downward pressure on wage growth indicators. (08:30 EDT)

See our Economic Calendar for a complete listing of upcoming data releases.


Karl Schamotta

Karl Schamotta

Chief Market Strategist

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