Fed Reverses Course On Balance Sheet Normalization “Temporarily” (Its Always Sunny On Wall Street)

Yes, it is always sunny on Wall Street.  Particularly when The Federal Reserve is running interference like the have since 2007.

The Federal Reserve has reversed course on its unwind of their balance sheet. Allegedly temporarily.

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While The Fed kept rates at 25 basis points for a long time (since 2007), they finally started raising them under Fed Chair Jerome Powell.  And had started lowering them again before an apparent halt.

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Yes, the year-end repo skitter led The Fed to inject > $200 billion of temporary funding for the banks.

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Jerome Powell leading the discussion of Fed policy.

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Double Shot! World Economy Haunted by Risk Just Got a Double Shot in the Arm (How Long Before Mortgage Rates Rise??)

Its a double shot of economic love!

(Bloomberg) — Two of the biggest hurdles constraining the world economyhave just been cleared.

Dogged for most of 2019 by trade tensions and political risk that hammered business confidence, the outlook for global growth will enter 2020 on a firmer footing after the U.S. and China struck a partial trade deal and outlook for Brexit cleared somewhat.

“The China trade deal and U.K. election result have taken out a major tail risk overhanging markets and companies,” said Ben Emons, managing director for global macro strategy at Medley Global Advisors in New York. “Business confidence should see a large boost that could see a restart of global investment, inventory rebuild and a resurgence of global trade volume.”

Like financial markets, most economists had factored in some kind of phase-one trade agreement between the world’s largest economies when projecting the world economy would stabilize into 2020 after a recession scare earlier this year.

But at a minimum, the agreement between President Donald Trump and President Xi Jinping means some of the more dire scenarios being contemplated just a few months ago now appear less likely. 

Bloomberg Economics estimated in June that the cost of the U.S.-China trade war could reach $1.2 trillion by 2021, with the impact spread across the Asian supply chain. That estimate was based on 25% tariffs on all U.S.-China trade and a 10% drop in stock markets.

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Both the VIX and TYVIX are near historic lows.

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With this bevy of good news, how long before residential mortgage rates rise??

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Of course, forecasting is difficult … like forecasting your second wife.

 

Fed Leaves Rates on Hold; Forecasts Show No Change Through 2020

(Bloomberg) — The Federal Reserve left interest rates unchanged and signaled it would stay on hold through 2020, keeping it on the sidelines in an election year while also opening the possibility it might buy short-term coupon-bearing securities to ease money-market strain.

“Our economic outlook remains a favorable one despite global developments and ongoing risks,” Chairman Jerome Powell told a press conference Wednesday in Washington following the decision. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

The Treasury 10-year yields fell below 1.8%, the dollar declined and U.S. stocks edged higher. Powell spoke after the Federal Open Market Committee held the target range of the federal funds rate steady at 1.5% to 1.75% and its median forecast showed no rate change through next year.

“The FOMC’s monetary policy message is that the Fed is on hold and that it would take some significant change in the outlook to induce the Fed to move,” Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note. “Powell, however, made some news when talking about the problems affecting the repo market.”

Powell told reporters that the committee might consider widening reserves management-related Treasuries purchases to include short-term coupon-bearing securities, if necessary, to ease liquidity strains in money markets.

Here is the current Fed “Dots Plot” indicating a hold on rate changes through 2020, but rising after the 2020 election.

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The Fed has helped push relevant rate to around 1.576%.

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Jerome Powell should be happy that someone hasn’t painted a picture of him ala Mexican revolutionary hero Emiliano Zapata.

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Jesse?

Supernatural! US Payrolls Smash Expectations With 266K Jobs Added (Average Hourly Earnings Climbed 3.1% YoY)

Supernatural!

Hiring roared back in a big way in November. U.S. employers added 266,000 jobs last month, topping all expectations, according to a Labor Department report Friday. The surge was boosted by General Motors Co. workers returning to work after a 40-day strike.

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Meanwhile, average hourly earnings climbed 3.1% from a year earlier, beating forecasts.

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The US jobless rate dipped to 3.5% and the underemployment rate dropped to 6.9%.

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On the unexpected bounce in jobs, the 10Y-3M yield curve is no longer screaming recession.

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And the US Treasury Actives curve and US dollar swaps curves are pretty similar from 2 years to 10 years.

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Supernatural!

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China Trade Rally: Investors Rush Into Equity ETFs Just In Time!

There is a China trade rally going on!

A 2% post-Thanksgiving slump in the U.S. stock market couldn’t have come at a worse time for investors in exchange-traded funds. More than $38 billion flowed into equity-focused ETFs in November, the biggest monthly influx in almost two years, data compiled by Bloomberg show. The inflows accounted for about 77% of cash absorbed by U.S. ETFs in the period through Nov. 30, the highest proportion since April.

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Fortunately for the stock market, the latest good news about US trade with China helped bolster a rally. Until we find out tomorrow that …

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Or is it Fools Rush In?

Recession Around The Corner? Evidence From Treasury Market And S&P 500 Earnings Sentiment

It has been the longest bull market in modern history, enabled by massive Central Bank intervention. But with trade wars raging, Brexit, Presidential impeachment over something, etc., there remains a significant risk of a recession over the next 12 months.

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If we look at the normalized change in the 10Y-3M curve minus normalized change in 10Y yields, we can see a heightened recession risk.

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Lower yields and steeper curves are not a good recipe.

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And then we have the decline in S&P 500 earnings estimates.

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Recession coming?

Does Carter’s “Misery Index” (Inflation + Unemployment) Forecast Recession? (No, Near Lowest Level Since Mid-1950s)

Back during the “days of malaise” under President Jimmy Carter, some clever wags thought of the term “misery index” which is the unemployment rate + inflation rate.

Sure enough, the misery index hit its all-time high in May 1980 of 21.93%. But the fear index subsided rapidly following the end of the July 1981 to November 1982 recession.

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But the misery index today is only 5.37%, near the lowest since the mid-1950s. So, no hint of an impending recession.

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Currently, the misery index is near its lowest level since the mid-1950s. The US Unemployment rate is low and is inflation is pretty low resulting in a misery index of 5.37%.

So, no recession in sight according to this indicator.

 

Achy-Breaky Curves: US Treasury Curve Flat For 5 Years, THEN Rises (Swaps Curve Inverted)

The US Treasury actives curve has gone achy-breaky.

That is, going out to 5 years, the US Treasury actives curve is overall flat, with undulations.

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And the US dollar swaps curve is higher at 3 months than at any other point on the curve.

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Here is a video of me forecasting the US Treasury yield curve.

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High-Beta Stock Trade Seizes Up Right After Everyone Piled In

High beta investment strategies are great … when the market is rising. But low (and negative beta) strategies seem appropriate when investors anticipate an equity market downturn.

Bloomberg — The market, it’s said, finds a way to maximize the pain. For everyone who fell in love with cyclical shares just in time for them to drop the most in two months this week, it’s an adage they can relate to.

Lurches in retail, technology and commodity stocks are spelling trouble for newly christened macro bulls, sending an exchange-traded fund that tracks high-volatility shares to its first decline since October. Back on top are health care, utilities and real estate, defensive sectors that dominated all year.

While none of the moves were huge, they stung fund managers who hoped economically sensitive industries were tickets to redemption after 71% of them trailed benchmarks through October. Betting on volatile shares has been a hallmark of late-season recovery strategies that looked like a sure thing as the S&P 500 rallied. This week was a reminder they’re not.

High-beta ETF falls for first week in five

Among struggling equity managers, a spate of improving economic reports opened their eyes to the possibility a pivot point was at hand for cyclicals. The veil lifted, mutual funds dutifully raised overweight exposure to the highest level in two years, according to Goldman Sachs, increasing allocations toward industrials and semiconductors and away from utilities and staples.

Here is the Invesco High Beta ETF, having a historic beta (relative to the S&P 500 index) of 1.30.

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The Invesco bond fund has a beta of 0.073.

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Invesco’s mortgage ETF (primarily backed by agency MBS) has a beta of … -0.025 relative to the S&P 500 index.

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Lastly, we have the Invesco Muni fund with a beta of 0.044.

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Of course, investors can hedge market downturns using options.

And we are talking about BETA and not BETO!

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Bitcoin Drops to Near $7,000 as China Vows to ‘Dispose of’ Local Exchanges (Venezuelan Inflation at 54m%)

Cryptocurrencies have had a wild ride.

According to Dailybitcoinnews, cryptocurrency exchanges operating illegally in China face a new threat after the central bank announced it would take new steps to uphold its trading ban.

In a statement on Nov. 21, the People’s Bank of China (PBoC) warned it was taking action against entities allegedly involved in trading cryptocurrencies such as Bitcoin (BTC).

The move was in response to a rise in trading activity following China’s public endorsement of blockchain technology, it said. 

Pledging to keep its promise to outlaw trading, the PBoC vowed to “dispose of” any such activity it discovered under its jurisdiction.

Yes, Bitcoin has now plunged to near $7,000 and has broken through 3 resistance lines.

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All the major cryptocurrencies are down 5-6% this morning.

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How soon before others Central Banks try to eradicate cryptocurrencies?

Except for Venezuela, of course.

Venezuela President Nicolas Maduro, speaking on state television, said he was authorizing the use of 30 million oil barrels to back the country’s cryptocurrency, known as the petro.  

Too bad Maduro has already trashed the Bolivar. In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019. The Central Bank of Venezuela (BCV) officially estimates that the inflation rate increased to 53,798,500% between 2016 and April 2019.

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