Sive Morten
Special Consultant to the FPA
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FUNDAMENTALS
No doubts, Fed meeting and J. Powell speech is a high spot. But the most important - what he has said. Definitely Fed stands in frustration and indecision. CPI also brings important data. We try to understand why market has shown so different reaction. These are really big topics, guys, I do not know how we could put everything in just single weekly report, but we will try...
IS INFLATION GROWING OR FALLING?
We start from CPI discussion, because it has direct impact on J. Powell speech content and, in fact is some prequel to Fed's topic.
So, United States consumer price inflation eased to 4.0 percent in May 2023, the lowest level since March 2021. Inflation is slowing down - the general consumer price index (CPI) rose by just 0.12% MoM and 4.1% YoY. But here we miss very important thing - the slowdown in the overall CPI is quite justified, because in June 2022 the monthly growth reached an incredible 1.19%, and annual inflation just peaked at 8.9% (in the top 10 of the most intense monthly increases over the past 70 years), therefore, as the high base leaves, inflation slows down in conditions of sustained energy deflation. Simply speaking - current inflation is lower in relation to high level of last year. But, in general it mostly stands stable. That's why - from July 2023, the overall CPI will stop declining and stabilize in the range of 4.2-4.5%, at least until September.
And now we're coming to most interesting and tricky thing - Core CPI. Over the past three months, the inflation rate has been 0.41% monthly, over the past six months - 0.42%, and for the year - 0.43%. It means that it holds around 5% on YoY basis. As you can see, there is no slowdown , while from January 2010 to December 2019 the average monthly increase was 0.15%. Accordingly, the current background inflation is 2.8 times higher than the historical norm.
The category “housing and hotel rent” contributes almost 0.2 percentage points to the monthly increase in inflation, being the heaviest (the largest among all inflation components – up to 1/3 in the CPI) and stable category (the largest inertia). This is the main problem in US underlying inflation that will remain for a very long time, as the gap between house prices and rents is still very large ( 53% in the rent and house price index), and historical experience shows that the gap is always absorbed, but it takes years.
Today it becomes clear that everything is much more complicated, primarily because the data on inflation in the United States, on the eve of the announcement of the rate and Powell's press conference, again turned out to be unexpected for the Fed leadership. The 4%+ annual growth of the Core CPI is definitely not the numbers that the Fed wants to see after so-called the "stabilization" of price dynamics.
Since this is not the first time such a situation has occurred, it should be extremely carefully analyzed from an objective point of view. And the details of Powell's own reasoning in the next part of research below. The problems of Powell (and in general, the US monetary authorities) that they have been adjusting macroeconomic models for many decades, which they use to predict the situation, under the liberal theory in which crises are of only one kind, cyclical. In reality, today there is a completely different crisis, a drop in the efficiency of capital.
As a result, statistics simply do not see many processes. And even if they manifest themselves in one way or another, their interpretation by experts does not correspond to reality. In particular, they do not see a systemic over-estimation of GDP, including by underestimating inflation (recall our discussion of GDP deflator and its comparison to CPI in service sector few months ago - there was definite under-estimation of GDP deflator for 3-4%). At the same time, deflationary processes also take place, but prices are rising in some sectors of the economy (IT products, food, transport), and deflation is in others (intermediate industrial products). And many industrial enterprises either close down or work at a loss for some time. Because they believe that the market conditions will improve and it is possible to suffer small losses due to rising costs in order to preserve the markets.
If the basic consumer inflation in the US is 0.4%, then this means about 5% per year, according to official data. This is a lot, especially in reality, which is always worse than the official figures. And if we also take into account that industrial inflation is in the stage of deep deflation, data for May -7.1% year-on-year, then the picture becomes even more complicated:
Such a drop is a sign of a deep industrial crisis and we see it in the data of recent weeks, but why then the price increase in the consumer sector, even without fuel and food? Theoretically, these are signs of a structural crisis and a consequence of higher rates (financial costs have increased). At the same time, the growing profit from sales does not reach manufacturers, most likely, it remains in the trade and financial sector. Indeed -
If we take a look at components they are widely different. Take a look how most "problem" spheres are changing over time and inflation migrates from one sphere to another. If couple years ago the problems were in transport and energy, later it was in food and medicine, now it is rent, education and services:
By the way, the question arises, who will then be able to use the industrial infrastructure being created (see the previous Review), it may turn out that it will not play a role in attempts to restore the United States. If cost efficiency will be negative, hardly it could help to improve situation. In any case, we see that the inflation picture desired by the leadership of the US monetary authorities does not manifest itself and this makes them nervous. In particular, perhaps because they promised representatives of the American elite that tightening monetary policy would give results. And it's not.
Experts tell the same about decreasing of inflation next month - according to the calculations of Credit Suisse chief strategist Jonathan Golub, today's inflation data is not so important - next month's value will be shocking. According to J. Golub, the June figures (released on July 12) will show a slowdown in inflation to 3.2%. But, this is not a scientific breakthrough but simple math - in May last year, inflation increased by 0.92% mom (which is why there was a sharp slowdown in inflation from 5 to 4.1% yoy), and a record 1.19% mom was in June 2022. If the monthly growth in June of this year is 0.3%, respectively, annual inflation will slow down to 3.2% - the minimum inflationary pressure since March 2021.
But, somehow they keep silence that it will start to grow again in August. Since July 2023, inflation has been stabilizing in the range of 3.4-3.8% YoY until October 2023. In July-September 2022, the average monthly price growth rate was 0.2%, and this year there may be an acceleration to 0.3-0.4% due to the neutralization of the deflating energy component. So, as soon as in the late summer-early fall, the euphoria around CPI slowdown should be over. And Fed clearly understands this, that's why J. Powell was so nervous and made few tricky statements. As a conclusion of our analysis we could say - it is an evident that inflation is not decreasing, despite unprecedented Fed efforts. Fed is fighting with symptoms (which the inflation is) but not with the reasons that have borne the inflation.
And now it becomes clear why market reacts so differently. Bulls shouted - let's buy, CPI is dropping. While bears call - let's sell core CPI is stable... In fact we just see nominal - to- core CPI convergence without any improvement in inflation. In fact - Powell said the same:
FED MEETING
Complete confusion, frustration, uncertainty and misunderstanding of what is happening. This is how Powell's performance can be described. In terms of content, Powell says less and less, but he still managed to catch the key theses.
Most important was not the rate decision per se but the subsequent press conference of Fed Chairman Powell and his admission that he does not understand something about the current economic processes. The inadequacy of the perception of reality recognized by the leaders of the US monetary authorities themselves in this place makes it fundamentally important. After the successful resolution of a rather virtual "default" crisis, it becomes clear that everything is much more complicated, primarily because the CPI data again turned out to be unexpected for the Fed leadership. This is definitely not the numbers that Fed would like to see.
In this situation, the main question arises: what does the Fed leadership think and what will it do, and specifically its head Powell? In 2022 J. Powell said - "I think we now have a better understanding of how little we understand inflation," Jerome Powell (June 29, 2022) and Powell today: I admit that the Fed's inflation forecasts over the past 2 years have been wrong." Actually, we already noted at the beginning of the Review that the Fed leadership does not understand the essence of current economic processes.
I do not want to re-print here the cover letter to the rate announcement and J. Powell's major comments, so you could check them in Telegram. Here we just point few major things:
That is, monetary policy will tighten, but the Fed leadership wants to see when inflation will react to the measures already taken. There is clearly no reaction yet, but Powell still hopes (!!!) for a positive result for him. Our opinion is that he will not get it (as in 2021). Additionally, at a press conference, he said (and, in part, repeated):
In fact, since the public demand's drop is unavoidable, the question that Fed has to decide is not about to "how to hold inflation" (which is just a symptom) but how to compensate the negative effect of deterioration of public consumption for national economy (which is the real reason of inflation). And even huge investments in industrial infrastructure, that we've mentioned last week, could bring no effect, in a case of negative return. So, in fact, Fed has to invent the new economy model that could, in current conditions, to generate EVA (economy value added), while they are busy with regulation of macroeconomic parameters, which is in fact - just the tool of tuning of existed model, that is not working.
Indirectly, Mitsubishi UFG tells the same and does not rule out that the regulator will deal with the consequences of one error with the help of another. First the Fed ignored inflation, now it doesn't pay attention to the scarcity of available money. According to the head of the bank's macro strategy department, this is a real "catch 22": until the US economy breaks down, they will not fix it.
JPow has tried to keep sharply hawkish tone, there is less and less understanding of what is happening. The Fed puts the rate hike on pause and tries to take time to assess what is going on and where everything is going. The signal for the markets is very negative, because the Fed admits to a lack of understanding of what is happening and begins to gesture. The inflation forecast for 2023 has been raised from 3.6 to 3.9%, the rate forecast has been raised from 5.1 to 5.6%.
But few things we could get. Frist is - they are looking primarily at core CPI numbers. As we've said - there will be no normalization, at least in nearest 12 months (or even longer). Thus, another source of policy easing is unexpected negative events in economy, if something breaks apart. The Fed was 1.5 years late in correcting monetary imbalances, missing the optimal timing for inflation stabilization. Now the Fed will be late with the normalization of tight financial conditions, creating critical imbalances throughout the chain of institutional entities.
Keeping inflation topic aside and focusing on US economy directly, some economists suggest that starting from July, the rate should have been reduced, to act with preventive measures, preventing the inevitable cash gaps and a wave of bankruptcies. In 2023, over 11 trillion of debt with a maturity of more than one year will be placed at high rates (preliminary own calculations), plus over 4 trillion more bills of the US Treasury and almost 1.5 trillion more corporate bills.
16-17 trillion dollars of debt, and maybe more, will feel all the pain of high rates. From June to December 2023, according to preliminary calculations, about 7 trillion of debt with a maturity of more than one year may go to refinancing and new loans, where the US Treasury will be particularly frolicking.
Bonds and loans in excess of 800 billion, and most likely more over-expenses on debts, excluding individuals. The further it goes, the more painful it is, because in 2024 the next stream of medium– and long-term bonds and loans is being refinanced, plus new loans need to be carried out.
Will the government and business digest over 800 billion additional interest expenses? The question is rhetorical. They will digest "not only everything", but someone will feel very bad. In any case, the business margin will drop significantly.
The Fed acted with a delay of 1.5 years in response to inflation, overslept the banking crisis in March 2023 (the first episode) and will obviously oversleep the gaps in business and banks' balance sheets from the second half of 2023 (not immediately, the process is accumulating with a sharp jump in entropy).
The rate should already be lowered from July and urgently, but the stock market bubble, relatively strong macro data and high background inflation due to rent will create the illusion of control. This is a mistake. They've already gone wild. Liquidity is already becoming a problem...
LIQUIDITY
Let's start with the fact that the US Treasury took only $57.4 billion to its accounts in the week to June 14, increasing the funds in the accounts to $134.9 billion - and this is with a goal of 425 billion at the end of the month. The tsunami of loans and the subsequent outflow of liquidity, which was written about almost every day, is not happening yet. Next week, the US Treasury plans net borrowings of ~ $115 billion.
Money markets recorded capital outflows for the first time since April. Still small ones - only 4.66 billion, and this is the first time in a long period. ️Apart from the traditional tax-related outflow in April, this is the first outflow of money from the money market since February ... ️Notably, the outflow was entirely institutional (-$8.46B) while MM retail funds received an inflow of $3.8B (8th week in a row)...
The Fed's balance sheet rose for the second week in a row. Changes are insignificant - only about a billion, and a week earlier it grew by 3.47 billion. ️Still remains slightly higher than before the collapse of the SLV bank. ️For QT, the Fed sold a tiny $1.64 billion . Apparently, the Fed also does not want to lean and strain the market even more, increasing pressure from the Ministry of Finance. The authorities are acting cautiously.
Well, the latest data on liquidity in the USA finally comes, it seems. The reverse repo with the Fed has fallen heavily in recent days. In fact, $117 billion has gone in a week. According to the Treasury General Account (TGA), an increase of $ 60 billion. On reserves - minus $25 billion. This is the data for Wednesday. The reverse repo has not seen under $2 Trln for the long time ...
In principle, $177 billion of liquidity has entered the system. and J. Yellen took only $57 billion from them. Where other $120 billion has gone is still a mystery. But in general, it becomes clear that the reverse repo was really the source for the growth of the national debt. If this continues, then, you see, by the end of the year, Yellen will drag everything from the reverse repo into the treasury. Although she does not want to add up $ 2 trillion on the account, but to spend it, so we will also monitor bank reserves in conjunction with M2.
As a bottom line:
Keeping it short, we come to number of conclusions. First is, we do not have real decrease of inflation but only statistical effect which deceives investors. After unprecedented Fed efforts to hold inflation, they have signed its own incompetency, acknowledging that they do not know what is going on and what to do next - "we are going with the flow, not understanding where everything is going, and we hope that our actions will allow us to steer along a safe trajectory". It is difficult to count how many times it was said "we need time", "we do not understand", "it is difficult to estimate", "it is too early to make forecasts", however, uncertainty and uncertainty came through from every air shaking from Powell. The Fed has not looked so helpless for a long time.
Second is - decrease in inflation is temporal, and in next 1-2 months it should stabilize around 4-4.5%, which means that current anti-USD euphoria on the market is temporal. Besides, it is still the question, what ECB inflation will show. Hardly better performance. It makes possible to suggest that current EUR rally is not yet the major reversal of long-term bear trend. Although some more extended upside targets, such as 1.11 still could be reached in near term.
Finally, US liquidity is drying. US Treasury borrows very gently, while Fed almost stops QT programme. The source of Reverse Repo is actively using by US Treasury. It means that they offer rate premium and hardly could grab all $2 Trln out. Since US government appetite constantly grows, very soon Treasury will have to start looking for additional source of liquidity - public savings, stocks and crypto currency market. Borrowings of at least ~$1.5 Trln by the end of the year nobody cancelled yet.
All together it means that it is too early to bury the US Dollar. And closer to the end of the summer situation could change drastically. Meantime, we should keep nose to the wind and just follow to trading setups that we get. It seems that we have 1-2 months at least, when EUR could show some upward action, or at least, stay on the surface.
No doubts, Fed meeting and J. Powell speech is a high spot. But the most important - what he has said. Definitely Fed stands in frustration and indecision. CPI also brings important data. We try to understand why market has shown so different reaction. These are really big topics, guys, I do not know how we could put everything in just single weekly report, but we will try...
IS INFLATION GROWING OR FALLING?
We start from CPI discussion, because it has direct impact on J. Powell speech content and, in fact is some prequel to Fed's topic.
So, United States consumer price inflation eased to 4.0 percent in May 2023, the lowest level since March 2021. Inflation is slowing down - the general consumer price index (CPI) rose by just 0.12% MoM and 4.1% YoY. But here we miss very important thing - the slowdown in the overall CPI is quite justified, because in June 2022 the monthly growth reached an incredible 1.19%, and annual inflation just peaked at 8.9% (in the top 10 of the most intense monthly increases over the past 70 years), therefore, as the high base leaves, inflation slows down in conditions of sustained energy deflation. Simply speaking - current inflation is lower in relation to high level of last year. But, in general it mostly stands stable. That's why - from July 2023, the overall CPI will stop declining and stabilize in the range of 4.2-4.5%, at least until September.
And now we're coming to most interesting and tricky thing - Core CPI. Over the past three months, the inflation rate has been 0.41% monthly, over the past six months - 0.42%, and for the year - 0.43%. It means that it holds around 5% on YoY basis. As you can see, there is no slowdown , while from January 2010 to December 2019 the average monthly increase was 0.15%. Accordingly, the current background inflation is 2.8 times higher than the historical norm.
The category “housing and hotel rent” contributes almost 0.2 percentage points to the monthly increase in inflation, being the heaviest (the largest among all inflation components – up to 1/3 in the CPI) and stable category (the largest inertia). This is the main problem in US underlying inflation that will remain for a very long time, as the gap between house prices and rents is still very large ( 53% in the rent and house price index), and historical experience shows that the gap is always absorbed, but it takes years.
Today it becomes clear that everything is much more complicated, primarily because the data on inflation in the United States, on the eve of the announcement of the rate and Powell's press conference, again turned out to be unexpected for the Fed leadership. The 4%+ annual growth of the Core CPI is definitely not the numbers that the Fed wants to see after so-called the "stabilization" of price dynamics.
Since this is not the first time such a situation has occurred, it should be extremely carefully analyzed from an objective point of view. And the details of Powell's own reasoning in the next part of research below. The problems of Powell (and in general, the US monetary authorities) that they have been adjusting macroeconomic models for many decades, which they use to predict the situation, under the liberal theory in which crises are of only one kind, cyclical. In reality, today there is a completely different crisis, a drop in the efficiency of capital.
As a result, statistics simply do not see many processes. And even if they manifest themselves in one way or another, their interpretation by experts does not correspond to reality. In particular, they do not see a systemic over-estimation of GDP, including by underestimating inflation (recall our discussion of GDP deflator and its comparison to CPI in service sector few months ago - there was definite under-estimation of GDP deflator for 3-4%). At the same time, deflationary processes also take place, but prices are rising in some sectors of the economy (IT products, food, transport), and deflation is in others (intermediate industrial products). And many industrial enterprises either close down or work at a loss for some time. Because they believe that the market conditions will improve and it is possible to suffer small losses due to rising costs in order to preserve the markets.
If the basic consumer inflation in the US is 0.4%, then this means about 5% per year, according to official data. This is a lot, especially in reality, which is always worse than the official figures. And if we also take into account that industrial inflation is in the stage of deep deflation, data for May -7.1% year-on-year, then the picture becomes even more complicated:
Such a drop is a sign of a deep industrial crisis and we see it in the data of recent weeks, but why then the price increase in the consumer sector, even without fuel and food? Theoretically, these are signs of a structural crisis and a consequence of higher rates (financial costs have increased). At the same time, the growing profit from sales does not reach manufacturers, most likely, it remains in the trade and financial sector. Indeed -
If we take a look at components they are widely different. Take a look how most "problem" spheres are changing over time and inflation migrates from one sphere to another. If couple years ago the problems were in transport and energy, later it was in food and medicine, now it is rent, education and services:
By the way, the question arises, who will then be able to use the industrial infrastructure being created (see the previous Review), it may turn out that it will not play a role in attempts to restore the United States. If cost efficiency will be negative, hardly it could help to improve situation. In any case, we see that the inflation picture desired by the leadership of the US monetary authorities does not manifest itself and this makes them nervous. In particular, perhaps because they promised representatives of the American elite that tightening monetary policy would give results. And it's not.
Experts tell the same about decreasing of inflation next month - according to the calculations of Credit Suisse chief strategist Jonathan Golub, today's inflation data is not so important - next month's value will be shocking. According to J. Golub, the June figures (released on July 12) will show a slowdown in inflation to 3.2%. But, this is not a scientific breakthrough but simple math - in May last year, inflation increased by 0.92% mom (which is why there was a sharp slowdown in inflation from 5 to 4.1% yoy), and a record 1.19% mom was in June 2022. If the monthly growth in June of this year is 0.3%, respectively, annual inflation will slow down to 3.2% - the minimum inflationary pressure since March 2021.
But, somehow they keep silence that it will start to grow again in August. Since July 2023, inflation has been stabilizing in the range of 3.4-3.8% YoY until October 2023. In July-September 2022, the average monthly price growth rate was 0.2%, and this year there may be an acceleration to 0.3-0.4% due to the neutralization of the deflating energy component. So, as soon as in the late summer-early fall, the euphoria around CPI slowdown should be over. And Fed clearly understands this, that's why J. Powell was so nervous and made few tricky statements. As a conclusion of our analysis we could say - it is an evident that inflation is not decreasing, despite unprecedented Fed efforts. Fed is fighting with symptoms (which the inflation is) but not with the reasons that have borne the inflation.
And now it becomes clear why market reacts so differently. Bulls shouted - let's buy, CPI is dropping. While bears call - let's sell core CPI is stable... In fact we just see nominal - to- core CPI convergence without any improvement in inflation. In fact - Powell said the same:
FED MEETING
Complete confusion, frustration, uncertainty and misunderstanding of what is happening. This is how Powell's performance can be described. In terms of content, Powell says less and less, but he still managed to catch the key theses.
Most important was not the rate decision per se but the subsequent press conference of Fed Chairman Powell and his admission that he does not understand something about the current economic processes. The inadequacy of the perception of reality recognized by the leaders of the US monetary authorities themselves in this place makes it fundamentally important. After the successful resolution of a rather virtual "default" crisis, it becomes clear that everything is much more complicated, primarily because the CPI data again turned out to be unexpected for the Fed leadership. This is definitely not the numbers that Fed would like to see.
In this situation, the main question arises: what does the Fed leadership think and what will it do, and specifically its head Powell? In 2022 J. Powell said - "I think we now have a better understanding of how little we understand inflation," Jerome Powell (June 29, 2022) and Powell today: I admit that the Fed's inflation forecasts over the past 2 years have been wrong." Actually, we already noted at the beginning of the Review that the Fed leadership does not understand the essence of current economic processes.
I do not want to re-print here the cover letter to the rate announcement and J. Powell's major comments, so you could check them in Telegram. Here we just point few major things:
- The Fed rate ceiling is expected to be 5.5%-5.75% by the end of 2023;
- rates are expected to decrease in 2024;
- The Fed's balance sheet will continue to shrink as part of the previously announced plan.
- Fed doesn't intend to fund US Federal debt
That is, monetary policy will tighten, but the Fed leadership wants to see when inflation will react to the measures already taken. There is clearly no reaction yet, but Powell still hopes (!!!) for a positive result for him. Our opinion is that he will not get it (as in 2021). Additionally, at a press conference, he said (and, in part, repeated):
- firmly committed to the 2% inflation target%;
- almost all politicians consider it appropriate to raise the rate further;
- The US Federal Reserve may raise the rate 2 more times — up to 5.6%;
- inflationary risks still persist;
- we do not see a steady decline in inflation in the PCE yet."
- I admit that the Fed's forecasts for inflation over the past 2 years were incorrect"!
In fact, since the public demand's drop is unavoidable, the question that Fed has to decide is not about to "how to hold inflation" (which is just a symptom) but how to compensate the negative effect of deterioration of public consumption for national economy (which is the real reason of inflation). And even huge investments in industrial infrastructure, that we've mentioned last week, could bring no effect, in a case of negative return. So, in fact, Fed has to invent the new economy model that could, in current conditions, to generate EVA (economy value added), while they are busy with regulation of macroeconomic parameters, which is in fact - just the tool of tuning of existed model, that is not working.
Indirectly, Mitsubishi UFG tells the same and does not rule out that the regulator will deal with the consequences of one error with the help of another. First the Fed ignored inflation, now it doesn't pay attention to the scarcity of available money. According to the head of the bank's macro strategy department, this is a real "catch 22": until the US economy breaks down, they will not fix it.
JPow has tried to keep sharply hawkish tone, there is less and less understanding of what is happening. The Fed puts the rate hike on pause and tries to take time to assess what is going on and where everything is going. The signal for the markets is very negative, because the Fed admits to a lack of understanding of what is happening and begins to gesture. The inflation forecast for 2023 has been raised from 3.6 to 3.9%, the rate forecast has been raised from 5.1 to 5.6%.
But few things we could get. Frist is - they are looking primarily at core CPI numbers. As we've said - there will be no normalization, at least in nearest 12 months (or even longer). Thus, another source of policy easing is unexpected negative events in economy, if something breaks apart. The Fed was 1.5 years late in correcting monetary imbalances, missing the optimal timing for inflation stabilization. Now the Fed will be late with the normalization of tight financial conditions, creating critical imbalances throughout the chain of institutional entities.
Keeping inflation topic aside and focusing on US economy directly, some economists suggest that starting from July, the rate should have been reduced, to act with preventive measures, preventing the inevitable cash gaps and a wave of bankruptcies. In 2023, over 11 trillion of debt with a maturity of more than one year will be placed at high rates (preliminary own calculations), plus over 4 trillion more bills of the US Treasury and almost 1.5 trillion more corporate bills.
16-17 trillion dollars of debt, and maybe more, will feel all the pain of high rates. From June to December 2023, according to preliminary calculations, about 7 trillion of debt with a maturity of more than one year may go to refinancing and new loans, where the US Treasury will be particularly frolicking.
Bonds and loans in excess of 800 billion, and most likely more over-expenses on debts, excluding individuals. The further it goes, the more painful it is, because in 2024 the next stream of medium– and long-term bonds and loans is being refinanced, plus new loans need to be carried out.
Will the government and business digest over 800 billion additional interest expenses? The question is rhetorical. They will digest "not only everything", but someone will feel very bad. In any case, the business margin will drop significantly.
The Fed acted with a delay of 1.5 years in response to inflation, overslept the banking crisis in March 2023 (the first episode) and will obviously oversleep the gaps in business and banks' balance sheets from the second half of 2023 (not immediately, the process is accumulating with a sharp jump in entropy).
The rate should already be lowered from July and urgently, but the stock market bubble, relatively strong macro data and high background inflation due to rent will create the illusion of control. This is a mistake. They've already gone wild. Liquidity is already becoming a problem...
LIQUIDITY
Let's start with the fact that the US Treasury took only $57.4 billion to its accounts in the week to June 14, increasing the funds in the accounts to $134.9 billion - and this is with a goal of 425 billion at the end of the month. The tsunami of loans and the subsequent outflow of liquidity, which was written about almost every day, is not happening yet. Next week, the US Treasury plans net borrowings of ~ $115 billion.
Money markets recorded capital outflows for the first time since April. Still small ones - only 4.66 billion, and this is the first time in a long period. ️Apart from the traditional tax-related outflow in April, this is the first outflow of money from the money market since February ... ️Notably, the outflow was entirely institutional (-$8.46B) while MM retail funds received an inflow of $3.8B (8th week in a row)...
The Fed's balance sheet rose for the second week in a row. Changes are insignificant - only about a billion, and a week earlier it grew by 3.47 billion. ️Still remains slightly higher than before the collapse of the SLV bank. ️For QT, the Fed sold a tiny $1.64 billion . Apparently, the Fed also does not want to lean and strain the market even more, increasing pressure from the Ministry of Finance. The authorities are acting cautiously.
Well, the latest data on liquidity in the USA finally comes, it seems. The reverse repo with the Fed has fallen heavily in recent days. In fact, $117 billion has gone in a week. According to the Treasury General Account (TGA), an increase of $ 60 billion. On reserves - minus $25 billion. This is the data for Wednesday. The reverse repo has not seen under $2 Trln for the long time ...
In principle, $177 billion of liquidity has entered the system. and J. Yellen took only $57 billion from them. Where other $120 billion has gone is still a mystery. But in general, it becomes clear that the reverse repo was really the source for the growth of the national debt. If this continues, then, you see, by the end of the year, Yellen will drag everything from the reverse repo into the treasury. Although she does not want to add up $ 2 trillion on the account, but to spend it, so we will also monitor bank reserves in conjunction with M2.
As a bottom line:
Keeping it short, we come to number of conclusions. First is, we do not have real decrease of inflation but only statistical effect which deceives investors. After unprecedented Fed efforts to hold inflation, they have signed its own incompetency, acknowledging that they do not know what is going on and what to do next - "we are going with the flow, not understanding where everything is going, and we hope that our actions will allow us to steer along a safe trajectory". It is difficult to count how many times it was said "we need time", "we do not understand", "it is difficult to estimate", "it is too early to make forecasts", however, uncertainty and uncertainty came through from every air shaking from Powell. The Fed has not looked so helpless for a long time.
Second is - decrease in inflation is temporal, and in next 1-2 months it should stabilize around 4-4.5%, which means that current anti-USD euphoria on the market is temporal. Besides, it is still the question, what ECB inflation will show. Hardly better performance. It makes possible to suggest that current EUR rally is not yet the major reversal of long-term bear trend. Although some more extended upside targets, such as 1.11 still could be reached in near term.
Finally, US liquidity is drying. US Treasury borrows very gently, while Fed almost stops QT programme. The source of Reverse Repo is actively using by US Treasury. It means that they offer rate premium and hardly could grab all $2 Trln out. Since US government appetite constantly grows, very soon Treasury will have to start looking for additional source of liquidity - public savings, stocks and crypto currency market. Borrowings of at least ~$1.5 Trln by the end of the year nobody cancelled yet.
All together it means that it is too early to bury the US Dollar. And closer to the end of the summer situation could change drastically. Meantime, we should keep nose to the wind and just follow to trading setups that we get. It seems that we have 1-2 months at least, when EUR could show some upward action, or at least, stay on the surface.
