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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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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Fed Monkey? Mega Bond Sell-Off Spurs $1.2 Billion Outflow From Treasury Fund As Gold Futures Decline

As Europe shows signs of economic life and US recession fears dim, we are seeing an exodus from long-dated Treasuries and a large turnover in gold futures. But are markets expecting more active intervention by The Fed? (Aka, Fed Monkey).

(Bloomberg) — Investors are pulling the plug on a strategy tracking long-dated Treasuries as U.S. stocks trade near all-time highs.

The iShares 20+ Year Treasury Bond exchange-traded fund, ticker TLT, posted its worst week of outflows on record, with traders yanking more than $1.2 billion, according to data compiled by Bloomberg. The 10-year U.S. government bond yield soared in the span, approaching 2%.

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Meanwhile, gold futures fell to a three-month low as contracts equal to over 3 million ounces changed hands in half an hour on the Comex.

In the 30 minutes ended 10:30 a.m. in New York Monday, 33,596 contracts were traded, more than triple the 100-day average for that time of day. Futures have declined in recent weeks as growth concerns ebbed, damping haven demand for the precious metal.

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Is The Fed Monkey recession prevention system working?

A thanks to our veterans on this Veterans’ Day!

 

Conference Board Leading Index MoM Prints At -0.1% (NOT Screaming Impending Recession, But Fed Manning The Bilge Pumps!)

The Conference Board leading index printed at -0.1% MoM indicating a slow but expanding economy through early 2020.

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But Jerome Powell and The Federal Reserve are manning the economic bilge pumps just in case.

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Yes, The Fed will be trying to pump liquidity into the economic ship in case it takes on too much salt water.

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“Man the pumps!!!”

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Iron Man! Copper And Iron Futures Prices Decline As Global Growth Continues Slowing (Gold-Copper Ratio Similar To 10Y Treasury Yield)

Iron Man!

As a sign of continued slowing global growth, essential dry commodities like iron ore and copper have been declining since April/May of 2019.

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The copper-gold ratio has shown a decline after peaking in June 2018.

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The copper-gold chart looks similar to the 10Y US Treasury yield chart.

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Is the global economy paranoid about China-US trade and Brexit impacts?

 

Trade Fog! UK Industrial Production Falls 1.8% YoY In August, China’s Offshore Currency Goes Bananas And Gold Price/ Volatility Rises, V2X Volatility Goes Haywire

This is an update on key economic news relating to US/China trade and UK/EU Brexit talks. Better known as Trade Fog … or simply “The Fog.” 

On the Brexit side, the UK avoided recession by posting of 0.3% in August. Unfortunately, UK industrial production tanked to -1.8% YoY signaling a slowdown for the UK economy.

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On the China/US trade arm wrestling match, China’s offshore currency is showing volatility as even the NBA is getting caught up in the trade scuffle.

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The volatility surface for the CNH is quite steep.

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Of course, trade fog helps assets such as gold to rise.

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The volatility surface for gold is similar to that of the Chinese offshore currency.

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Trade fog (or trade vacillation) is on the rise as seen in this chart of V2X volatility.

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The V2X index is above its various historic moving averages.

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As Brexit negotiation crawl along and the US meets with China or tariffs, we continue to see “The Fog” until Brexit and tariffs are finalized. Throw in Federal Reserve policy errors and we have a party!

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Perry Omo? Fed Will Likely Restart QE In November (SOFR, Repo Rates Stabilize To Near Normal)

Is Fed Chair Jerome Powell really Perry Como? Or Perry OMO?

To the disappointment of many, Powell did not lower the target rate by 50 points and did not announce a resumption of QE.  Instead, the FOMC realigned both interest on excess reserves (IOER) and the reverse repo (RRP) rate lower by 5bp. Powell noted during his press conference that the Fed would use temporary open market operations (OMOs) “for the foreseeable future” to address pressures in funding markets.

However, and the reason why stocks shot up just before 3pm ET, is that that’s when Powell added that “it’s possible that we’ll need to resume the organic growth of the balance sheet, earlier than we thought. … We’ll be looking at this carefully in coming days and taking it up at the next meeting” in late October. Said otherwise, the Fed may not have announcer QE4 yesterday, but it will likely announce it in the very near future.

Sure enough, as Goldman wrote in its FOMC post-mortem, “we took this as a fairly strong hint and now expect the Fed to resume trend growth of its balance sheet in November with permanent OMOs. It is possible that the FOMC will take that opportunity to also reach a final decision on possibly shortening the maturity composition of its purchases, which it discussed at its May meeting.”

With all the OMO (or Perrys), the Fed’s Secured Overnight Finance Rate (SOFR) stabilized to normal levels.

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And the repo rate returned to near normal with the massive intervention with OMO.

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Fed Chair Jerome Powell (aka, Perry Omo).  Hot diggity dog. …

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On a side note, I tripped on a weight at the gym and fell against a weight machine. Fractured rib, badly swollen knee and dislocated perhaps broken finger(s). I call for a ban on power lifters dropping their weights and having them bounce in front of me!

The Big Squeeze! GC Repo Rate Crashes To 0% Amid Liquidity Squeeze And The Fed’s $53.2 Billion Flood Of Liquidity

Panic?

(Bloomberg) — The Federal Reserve took action to calm money markets on Tuesday, injecting billions in cash to quell a surge in short-term rates that was pushing up its policy benchmark rate and threatening to drive up borrowing costs for companies and consumers.

While the spike wasn’t evidence of any sort of imminent financial crisis, it highlighted how the Fed was losing control over short-term lending, one of its key tools for implementing monetary policy. It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget deficit. What’s more, many dealers have curtailed trading because of safeguards implemented after the 2008 crisis, making these markets more prone to volatility.

Money markets saw funding shortages Monday and Tuesday, driving the rate on one-day loans backed by Treasury bonds — known as repurchase agreements, or repos — as high as 10%, about four times greater than last week’s levels, according to ICAP data.

More importantly, the turmoil in the repo market caused a key benchmark for policy makers — known as the effective fed funds rate — to jump to 2.25%, an increase that, if left unchecked, could have started impacting broader borrowing costs in the economy. Because that’s at the top of the range where Fed officials want the rate to be, they are likely to make yet another tweak to a key part of their policy tool set to try to get things back on track when they meet Wednesday to set benchmark rates.

But the central bank didn’t wait until then to do something, resorting to a money-market operation it hasn’t deployed in a decade. The New York Fed bought $53.2 billion of securities on Tuesday, hoping to quell the liquidity squeeze. It appeared to help. For instance, the cost to borrow dollars for one week while lending euros retreated after almost doubling Monday.

For repo traders, hedge funds and others that rely on that market for financing, this intervention came none too soon.

A bit of an overshoot?

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And something that went unnoticed by many …

The New York Fed bought $3.001b of T-bills in the secondary market Tuesday as part of its planned reinvestment purchases.

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Yes, it is The Big Squeeze (not to confused with The Big Short).

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What up with that?

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Alternative Investments? Sovereign Bonds At A Premium, Duration Is Climbing As Rates Fall (But MBS Duration Falls With 10Y Yield), House Prices Slowing

Rising bond prices (premium) are spooking some investors as global bond yields plummet. The fear of a global slowdown/recession is spawning interest in alternative investments.

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As the 10-year Treasury yield drops, the duration of US Treasuries rises. On the other hand, the duration of Agency MBS is falling.

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And with national home price growth declining to the lowest rate since the beginning of The Fed’s QE3, where do we put our money?

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Firms like AQR offer products in the alternative investments sphere.

AAA Global Portfolio Space