We have been consistent in our view that US employment is worsening due to AI led productivity growth in US corporates & tariff uncertainties in small & medium business. Our own view on employment is that Oct NFP is it were to be released on 5th Nov as scheduled might have shown UR (Unemployment Ratio) at 4.5% with headline NFP at -25k. But as long as there is no data, we have to agree to Powell’s logic of driving slow in foggy conditions. As long as data is not there, FOMC won’t see the weakness in employment and hence not be motivated for a cut when inflation is still elevated. Hence we now see a December pause as the most likely outcome in absence of US employment data. We continue to expect 3 more consecutive cuts of 25 bps each when ever the employment data resumes. Hence in short term, we are bullish on DXY expecting to test 100.50 & 10yr UST testing 4.20. It was interesting to see the group dynamics at play in Oct FOMC. It appears to us that Powell has no more control on any fraction in the FOMC, whether pro cuts or status quo. The discussion around neutral rates also implies that without employment data at hand, the status quo group wont be agreeing to any further cuts. Powell himself sounded dovish on inflation when he said that tariff-driven inflation would be short-lived, and suggested that tariffs were contributing 50-60bp to current y-o-y inflation. Powell went further to say “inflation away from tariffs is actually not so far from our 2% goal,” echoing dovish remarks from officials like Governors Waller and Bowman. So it is not inflation but employment data which would be needed to bring in more cuts. Moving on to QT, the Committee announced that it will conclude balance sheet runoff on December 1, broadly in line with our expectations. Thereafter the Fed will roll over maturing Treasury securities via non-competitive bids at Treasury auctions, proportional to announced offering amounts, and reinvest MBS principal payments into Treasury bills. The end of quantitative tightening via runoff of the Federal Reserve's assets beginning in December will start the clock ticking toward a resumption of asset purchases in 2026 as Fed liabilities naturally increase. Demand for bank reserves and currency in circulation could force the central bank to begin buying Treasuries as soon as from Jan’26. More Fed bill purchases pave the way for upcoming shift in Treasury funding strategy. Although the Fed’s decision this week to reinvest MBS proceeds exclusively into bills from December onward was modest, it nonetheless aligns with the notion of transitioning towards a shorter maturity SOMA portfolio. We estimate the Fed will purchase $360bn of bills in 2026, with roughly 2/3 of that due to MBS reinvestments and 1/3 due to reserve management purchases.
