Sive Morten
Special Consultant to the FPA
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- 18,659
Fundamentals
This week we've got few important events, although they were not of a decisive kind. First is, another J. Powell speech, where he has tried to look hawkish, but hasn't succeed too much with this attempt, second - Bank of Turkey rate decision, when they have raised rate more than two times. Maybe it is not as important for global markets, but it is the sign of independence, that the division among countries is growing. If just few years ago, all central banks have kept an eye on Fed and ECB and tried to set their own policy in harmony with it, now we see big difference on example of Turkey and China. While BoE has increased rate for 0.5% at once. Finally, recent PMI data in France and Germany were surprisingly low. All these moments make investors doubt on right economical course of major countries, and be indecision on nearest perspectives.
Market overview
The dollar rose against the euro on Friday after dismal business activity data from around the globe soured risk sentiment and as hawkish comments from central banks added to pressure on riskier currencies. U.S. business activity fell to a three-month low in June as services growth eased for the first time this year and the contraction in the manufacturing sector deepened, closely watched survey data out Friday showed.
The overall picture, though, indicated U.S. economic growth ticked up a notch in the second quarter even as worries persist that the Federal Reserve's aggressive interest rate increases over the past year will trigger a recession.
Earlier in the session data showed euro zone business growth virtually stalled in June. A downturn in manufacturing deepened, while activity in the bloc's dominant services sector barely expanded, as overall demand fell for the first time since January. French PMI shows constant decreasing since 2021 and this week shows 47.3 level. Germany Manufacturing PMI has dropped to 41 level and EUR has started to loose value fast on yesterday's session, as investors have started to re-think of ECB rate decision next month. Hardly just PMI data will stop them from next rate hike, but it makes impact on overall background that could make an impact on ECB statement in July.
It is becoming boring week by week to consider all these data, because we do not see no changes. Crisis is migrating from one sphere to another but all indicators slowly but stubbornly decreasing. This is specific of structural crisis, or as it also calls - "decrease of capital efficiency". Also it is not a surprise why BoE has raised the rate for 0.5% on a background of high Core CPI data.
Friday's data arrived after rate hike surprises and hawkish comments from central banks globally which have renewed market fears that policymakers have further to go in tightening policy to tame inflation, even at the risk of tipping their economies into a recession.
Fed Chair Jerome Powell said on Thursday the central bank would move interest rates at a "careful pace" from here, but ruled out interest rate cuts "happening any time soon." Thus, Powell spoke again this week, but he did not say anything new, except for assurances of readiness to raise the rate. While noting that inflation remains very far from the Fed's target, Powell said it may make sense to still raise rates, at a more moderate pace.
Investors broadly expect rate hikes to resume at the Fed's July meeting, though financial market indicators reflect doubts that the Fed will deliver more increases beyond that.
At the end of the 70s, when there was high inflation in the United States, the then head of the Fed, the recently deceased Paul Volcker, raised the rate as much as 20% - because he understood that otherwise he could not cope with inflation. As we can see, the reaction of the current Fed leadership is completely different. Yes, since then, debt has accumulated, first of all, by households. The average household debt in the United States has roughly doubled in relation to real disposable income, from 60% to more than 100% (at its peak, in 2008, it was more than 130%). And this, in the context of an increase in the rate, has an extremely negative impact on aggregate demand. Namely, he mainly forms the US GDP.
But if you want to stimulate demand, then in order for this to have an effect, you need to maintain demand for domestic products. Then, in the 70s, there was no such question at all, there were practically no non-American products on the US markets. But today, the actual monetary authorities of the United States stimulate demand for Chinese products ... there is no economic sense in this at all.
In other words, the leadership of the US monetary authorities needs to decide. Or spit on inflation, lower the rate and start supporting demand by sharply raising import tariffs and stimulating domestic production. Or — forget about GDP and household incomes, recognize the inevitability of a sharp decline in living standards, raise the rate to 12-15% and reduce inflation. However, this will have to be done in an election year…
Data out on Friday showed that Japan's core consumer inflation exceeded forecasts in May and an index excluding fuel costs rose at the fastest annual pace in 42 years, putting pressure on the BOJ to phase out its massive stimulus. The British currency has come under pressure from rising expectations the UK economy could slip into recession after the Bank of England on Thursday delivered an outsized rate hike in response to persistent inflation.
In fact, it is impossible to avoid a serious decline in GDP and the standard of living of the population in the United States, and therefore it is necessary to think about how to make the process of re-industrialization profitable. We do not know whether the leaders of the US monetary authorities will reach this thought, but there are doubts that this is possible with their current composition. At the same time, what Powell fears can be understood. Well, for example, the excess (created in 2020) savings of the population are melting and will soon come to an end:
At the same time, they play an important role in the current demand. While banking sector shows not good processes at all:
And this is happening on a background of rising banking loans portfolios and debt, and not only in the US.
The Federal Reserve and the European Central Bank may mop up as much as 90% of the money they pumped into banks over the last decade now that high inflation and interest rates make that extra liquidity unnecessary, a paper by a Fed economist showed on Thursday. The Fed paper, which will be presented to top central bankers next week at the ECB's annual get-together in Portugal, delves into the question of how much cash the Fed and the ECB should keep in the banking system to satisfy demand for reserves now that monetary stimulus is no longer needed.
Its author, a senior adviser to the Federal Reserve Board, estimates the Fed could reduce total reserves from their current $6 trillion to between $600 billion and $3.3 trillion depending on whether it would accept U.S. government bonds or less coveted assets in return.
Similarly, the ECB could shrink its own provision of liquidity from 4.1 trillion euros ($4.51 trillion) at present to as little as 521 billion euros, if it only accepts German government bonds, or 1.4 trillion euros against other assets.Neither scenario is entirely plausible in the near term as both the Fed and the ECB have a mix of government bonds and other types of debt on their balance sheet.
Inflation in the United States will not decline as quickly as markets are currently pricing, according to a note from strategists at Goldman Sachs cited in a Bloomberg report on Saturday.
The strategists wrote that investors could be assuming that a sharp deceleration in U.S. economic growth will lead to a more rapid easing of price pressures. But the strategists, according to the Bloomberg report, saw limited chances for those factors to bring down inflation. The Goldman strategists recommended that investors who share their viewpoint on inflation buy one-year swaps to bet on inflation realizing higher than current market pricing, according to the Bloomberg report.
J. Yellen believes that the risk of a recession has decreased, but the consumer will have to sacrifice. In order for inflation to be under control, it will be necessary to achieve some reduction in consumer spending , Janet Yellen admitted. Simply speaking, the American consumer must become a victim in the fight against rising prices, and the main thing for the regulator is to achieve the necessary macroeconomic indicators
Next week we will get a lot of important data. The latest consumer confidence report arrives on Tuesday after the measure slipped to a six-month low in May. June's index is expected to tick higher. A window into the housing market also comes on Tuesday with the Case-Shiller national home price index. The index climbed 0.4% in March after adjusting for seasonal fluctuations. The week ends with the May personal consumption expenditures (PCE) price index on Friday, a key inflation gauge. In the 12 months through April, the PCE price index increased 4.4%.
China's June factory activity data takes centre stage on Friday, though if anything, the figures will add to the narrative of a faltering recovery. Beijing seems to be in no hurry to unleash massive stimulus so far and is instead drip-feeding it, first by cutting medium-term loan rates, then by lowering its key lending benchmarks.
Bad news could be taken as a positive, if traders see it as a way of pushing authorities to offer more support to the economy - as long as it eventually arrives. But if hopes are running high, patience is wearing thin. Most economists have cut their growth forecasts as the prospect of GDP adding more than 6% fades away.
Now is few words on Turkey central bank decision. A sharp increase in the rate by the central bank of Turkey, by 6.5% percent, to 15.0%. Moreover, he tends to raise it further. The importance of the decision of the Central Bank of Turkey is that before the major economies of the world followed the decisions of the US Federal Reserve. Accordingly, no one raised the stakes particularly. And then a decision was made that had nothing to do with American politics. This can be an example for everyone, even for the Fed leadership. In general, this is a serious event.
Update on US Liquidity situation
In continuation of the topic that the Fed (or Powell personally?) he does not understand how inflation works and why the increase in supply-side costs (including due to de-globalization processes) suddenly does not allow inflation to decrease. I invite everyone to read the speech of the Deputy head of the Federal Reserve Donald Kohn at the 51st economic conference of the Federal Reserve Bank of Boston entitled "The impact of globalization on inflation and their consequences for monetary policy."
In short, back in 2006, they understood the disinflationary effect of globalization on US domestic inflation. Maybe the equations were not formulated and the statistics were not knocked out, but they understood. In general, I bring this to confirm that the Fed knows that current inflation cannot be defeated by raising rates and that a high rate only leads to its retention at a high level, but for some reason it does not reduce it.
Now, back to liquidity... first thing that we have to mention here, and actually already mentioned in Telegram, that It's a tough time for investors again and they have to choose. Because the yield of the main asset classes equalized last week, and now it is the same for treasuries, high-quality corporate bonds and the S&P 500 index.
Since the default risk, at least nominal, is differ for all these assets, everything goes with the plan of US Treasury - investors directly or indirectly but should choose the US bonds that cared minimum risk among all the others. Thus, the likelihood of a massive rebalancing is getting higher. ️Recall that earlier JP Morgan experts predicted a powerful correction in stock markets as part of the rebalancing. The ongoing stock rally will face a new threat over the next few weeks as the world's largest money managers look to divest up to $150 billion worth of stocks, they write.
JPMorgan Chase & Co. forecast that portfolios, including sovereign and pension fund portfolios, will be reallocated to bonds to meet allocation targets, the largest rebalancing to bonds since Q4 2021. Bank experts predict a powerful correction as part of the rebalancing. The ongoing stock rally will face a new threat over the next few weeks as the world's largest money managers look to divest up to $150 billion worth of stocks, they write.
JPMorgan Chase & Co. forecasts that portfolios, including sovereign and pension fund portfolios, will be reallocated to bonds to meet allocation targets, the largest rebalancing to bonds since Q4 2021 . According to JPMorgan strategist Nikolaos Panigirtzoglou, this process could reduce the price of global stocks by as much as 5%.
To be honest, there is no better definition of a bubble - for the first time in history, the yield of cash, bonds and US stocks is at the same level - 5.3%
Assets with different risks are traded with the same yield. It is important to understand here that such an imbalance is a problem in itself. How problematic it was that banks had zero cost of short funding and invested in long-term instruments. Any crisis is built on imbalances of risk and return.
Meantime the TGA account (the account of the Ministry of Finance in the Fed) has grown to $ 328 billion, and the reverse repo has stopped shrinking since June 15 and starts growing. Major reasons for that is no auctions for the shortest Treasuries, which are bought by moneymarket funds since then. So someone else bought the long ones.
Experts tell that it would be better to not hurry to draw conclusions about the reduction of liquidity in the market, because we still need to see what happened to bank reserves, to the assets of the Fed, with M2, or rather with M1 (we will not see this soon) in order to understand where the money came from. For now we see that this week Fed assets has dropped for ~ 26 Bln. The Fed sold its assets for a decent amount of $19.4 billion.
In general, in 2-3 weeks it will begin to clear up. But if the Ministry of Finance continues to place long securities, either it will become difficult for the markets, or banks have finally begun to collect long securities against the background of the termination of the Fed rate hike. Or maybe with the hope or understanding of a future rate cut, which will allow them to earn on these treasuries.
I would like to emphasize once again - all thoughts about "where the money comes from" to replenish the account of the Ministry of Finance rest not only on where this money is - in reverse repo, in bank reserves, in a safe in bundles or somewhere else, but also in the actions of the Ministry of Finance, the Fed's rate decisions, regulation and, in fact, the rate on the placed Treasuries in comparison with the current alternative rates.
That is, no unambiguous forecasts "liquidity from the market will go to buy new issues of treasuries and there will be hell" or "new money will come from repo / reserves, etc. and this will be an infusion of liquidity into the system" cannot be given. Too many unknowns, unfortunately.
As you remember, on the eve of raising the debt ceiling, the Ministry of Finance placed mainly short papers for a month. Who bought them? It doesn't matter at all. They were bought by someone who wanted exactly short papers, not long ones. It can be money market funds, for example, or someone else.
If you look at the auction results at the link above, you can see that there are also long paper placements. Those who needed short securities as a conditional analogue of a cache or a short deposit will not buy long ones. Accordingly, when the peak of refinancing of a really large number of short securities that were placed by the Ministry of Finance in late May-early June comes, a significant part of these short securities can be refinanced by long ones. Well, simply because the Ministry of Finance wants to have long-term obligations.
Then what will happen? Then buyers of short securities will say "the number of short securities has fallen, so my alternative with a similar rate, where I can place in a short - reverse repo" and the amount of money in reverse repo with the Fed will grow even more, which means liquidity in the financial system will fall. It is unclear what will happen to the Fed's assets at the same time. They have slowed down now, assets are not declining, but they can, for example, accelerate this deferred sale and also take liquidity from the system.
This is just an illustration to the fact that everything is very uncertain and depends on the actions of the same Ministry of Finance and the Fed. If they want to pass safely, they will pass, if they don't want to, they will fail the system. Sometime on July 7-8, when the data will be released, it will become clear. If something doesn't fall loudly a couple of days before.
Meantime, we see that US banks continue to take money through emergency Fed assistance programs. The total amount of debt now stands at $106 billion.
️Banks' use of the Fed's emergency bank financing program rose again to a new record of $0.8 billion more than last week, while use of the discount window fell by $0.4 billion to $3.2 billion.
For the second week in a row, money market funds record an out flow️. The decline in funds was $18.2 billion, the biggest weekly decline since the week of Christmas 2022. Today these are liquid assets, and tomorrow they are Treasuries, which must be urgently sold. By the way, these are the very notorious $5 trillion that bothered investors. community a year ago, but then everyone was talking about the savings of the population, which were mostly in banks. Now, after the bank fall, trillions have moved to money market funds and many are waiting to be jittered out from there as well. Adventure is no worse than the gold of the Templars.
For this week balance is matched - Fed has sold around 19 Trln while around 18 Trln was out from money market funds. Changes in BTFP programme and Ministry of Finance cash are not significant. To better understand what Fed and US Treasury intends to do, we need to wait when really big new US Bonds issues will be placed, and what will happen then. By far fluctuations look too small.
In general, it can be noted that against the background of the ongoing structural crisis, which is no longer even interesting to comment on, the macroeconomic picture has not changed for many months, the only instrument to maintain the situation is the emission. Either monetary (from the central banks), or credit. Which makes it increasingly dangerous to tighten monetary policy, since it can cause a collapse of defaults, both private and corporate. With the corresponding collapse of financial markets.
Of course, based only on macroeconomic data, it is quite difficult to determine this moment, but the general trend, apparently, can no longer change. It remains to develop compensatory measures and not to panic.
Price action looks very nervous right now. Recall how brave EUR were climbing higher on a background of Fed/ECB decision last week and how fast it has turned down this week. It discovers that investors are not sure with current trend and too sensitive to the news of any kind. EUR upside action, despite it looks fast and solid, but has the lack of safety margin, bringing risks to be over at any moment. Signs of PMI weakness makes investors doubt on EUR performance and ECB decision next time. With such a background the best decision is to go from one definite trading setup to another, without making too extended forecasts into the future.
This week we've got few important events, although they were not of a decisive kind. First is, another J. Powell speech, where he has tried to look hawkish, but hasn't succeed too much with this attempt, second - Bank of Turkey rate decision, when they have raised rate more than two times. Maybe it is not as important for global markets, but it is the sign of independence, that the division among countries is growing. If just few years ago, all central banks have kept an eye on Fed and ECB and tried to set their own policy in harmony with it, now we see big difference on example of Turkey and China. While BoE has increased rate for 0.5% at once. Finally, recent PMI data in France and Germany were surprisingly low. All these moments make investors doubt on right economical course of major countries, and be indecision on nearest perspectives.
Market overview
The dollar rose against the euro on Friday after dismal business activity data from around the globe soured risk sentiment and as hawkish comments from central banks added to pressure on riskier currencies. U.S. business activity fell to a three-month low in June as services growth eased for the first time this year and the contraction in the manufacturing sector deepened, closely watched survey data out Friday showed.
The overall picture, though, indicated U.S. economic growth ticked up a notch in the second quarter even as worries persist that the Federal Reserve's aggressive interest rate increases over the past year will trigger a recession.
Earlier in the session data showed euro zone business growth virtually stalled in June. A downturn in manufacturing deepened, while activity in the bloc's dominant services sector barely expanded, as overall demand fell for the first time since January. French PMI shows constant decreasing since 2021 and this week shows 47.3 level. Germany Manufacturing PMI has dropped to 41 level and EUR has started to loose value fast on yesterday's session, as investors have started to re-think of ECB rate decision next month. Hardly just PMI data will stop them from next rate hike, but it makes impact on overall background that could make an impact on ECB statement in July.
It is becoming boring week by week to consider all these data, because we do not see no changes. Crisis is migrating from one sphere to another but all indicators slowly but stubbornly decreasing. This is specific of structural crisis, or as it also calls - "decrease of capital efficiency". Also it is not a surprise why BoE has raised the rate for 0.5% on a background of high Core CPI data.
Friday's data arrived after rate hike surprises and hawkish comments from central banks globally which have renewed market fears that policymakers have further to go in tightening policy to tame inflation, even at the risk of tipping their economies into a recession.
Fed Chair Jerome Powell said on Thursday the central bank would move interest rates at a "careful pace" from here, but ruled out interest rate cuts "happening any time soon." Thus, Powell spoke again this week, but he did not say anything new, except for assurances of readiness to raise the rate. While noting that inflation remains very far from the Fed's target, Powell said it may make sense to still raise rates, at a more moderate pace.
Investors broadly expect rate hikes to resume at the Fed's July meeting, though financial market indicators reflect doubts that the Fed will deliver more increases beyond that.
At the end of the 70s, when there was high inflation in the United States, the then head of the Fed, the recently deceased Paul Volcker, raised the rate as much as 20% - because he understood that otherwise he could not cope with inflation. As we can see, the reaction of the current Fed leadership is completely different. Yes, since then, debt has accumulated, first of all, by households. The average household debt in the United States has roughly doubled in relation to real disposable income, from 60% to more than 100% (at its peak, in 2008, it was more than 130%). And this, in the context of an increase in the rate, has an extremely negative impact on aggregate demand. Namely, he mainly forms the US GDP.
But if you want to stimulate demand, then in order for this to have an effect, you need to maintain demand for domestic products. Then, in the 70s, there was no such question at all, there were practically no non-American products on the US markets. But today, the actual monetary authorities of the United States stimulate demand for Chinese products ... there is no economic sense in this at all.
In other words, the leadership of the US monetary authorities needs to decide. Or spit on inflation, lower the rate and start supporting demand by sharply raising import tariffs and stimulating domestic production. Or — forget about GDP and household incomes, recognize the inevitability of a sharp decline in living standards, raise the rate to 12-15% and reduce inflation. However, this will have to be done in an election year…
Data out on Friday showed that Japan's core consumer inflation exceeded forecasts in May and an index excluding fuel costs rose at the fastest annual pace in 42 years, putting pressure on the BOJ to phase out its massive stimulus. The British currency has come under pressure from rising expectations the UK economy could slip into recession after the Bank of England on Thursday delivered an outsized rate hike in response to persistent inflation.
In fact, it is impossible to avoid a serious decline in GDP and the standard of living of the population in the United States, and therefore it is necessary to think about how to make the process of re-industrialization profitable. We do not know whether the leaders of the US monetary authorities will reach this thought, but there are doubts that this is possible with their current composition. At the same time, what Powell fears can be understood. Well, for example, the excess (created in 2020) savings of the population are melting and will soon come to an end:
At the same time, they play an important role in the current demand. While banking sector shows not good processes at all:
And this is happening on a background of rising banking loans portfolios and debt, and not only in the US.
The Federal Reserve and the European Central Bank may mop up as much as 90% of the money they pumped into banks over the last decade now that high inflation and interest rates make that extra liquidity unnecessary, a paper by a Fed economist showed on Thursday. The Fed paper, which will be presented to top central bankers next week at the ECB's annual get-together in Portugal, delves into the question of how much cash the Fed and the ECB should keep in the banking system to satisfy demand for reserves now that monetary stimulus is no longer needed.
Its author, a senior adviser to the Federal Reserve Board, estimates the Fed could reduce total reserves from their current $6 trillion to between $600 billion and $3.3 trillion depending on whether it would accept U.S. government bonds or less coveted assets in return.
Similarly, the ECB could shrink its own provision of liquidity from 4.1 trillion euros ($4.51 trillion) at present to as little as 521 billion euros, if it only accepts German government bonds, or 1.4 trillion euros against other assets.Neither scenario is entirely plausible in the near term as both the Fed and the ECB have a mix of government bonds and other types of debt on their balance sheet.
Inflation in the United States will not decline as quickly as markets are currently pricing, according to a note from strategists at Goldman Sachs cited in a Bloomberg report on Saturday.
The strategists wrote that investors could be assuming that a sharp deceleration in U.S. economic growth will lead to a more rapid easing of price pressures. But the strategists, according to the Bloomberg report, saw limited chances for those factors to bring down inflation. The Goldman strategists recommended that investors who share their viewpoint on inflation buy one-year swaps to bet on inflation realizing higher than current market pricing, according to the Bloomberg report.
J. Yellen believes that the risk of a recession has decreased, but the consumer will have to sacrifice. In order for inflation to be under control, it will be necessary to achieve some reduction in consumer spending , Janet Yellen admitted. Simply speaking, the American consumer must become a victim in the fight against rising prices, and the main thing for the regulator is to achieve the necessary macroeconomic indicators
Next week we will get a lot of important data. The latest consumer confidence report arrives on Tuesday after the measure slipped to a six-month low in May. June's index is expected to tick higher. A window into the housing market also comes on Tuesday with the Case-Shiller national home price index. The index climbed 0.4% in March after adjusting for seasonal fluctuations. The week ends with the May personal consumption expenditures (PCE) price index on Friday, a key inflation gauge. In the 12 months through April, the PCE price index increased 4.4%.
China's June factory activity data takes centre stage on Friday, though if anything, the figures will add to the narrative of a faltering recovery. Beijing seems to be in no hurry to unleash massive stimulus so far and is instead drip-feeding it, first by cutting medium-term loan rates, then by lowering its key lending benchmarks.
Bad news could be taken as a positive, if traders see it as a way of pushing authorities to offer more support to the economy - as long as it eventually arrives. But if hopes are running high, patience is wearing thin. Most economists have cut their growth forecasts as the prospect of GDP adding more than 6% fades away.
Now is few words on Turkey central bank decision. A sharp increase in the rate by the central bank of Turkey, by 6.5% percent, to 15.0%. Moreover, he tends to raise it further. The importance of the decision of the Central Bank of Turkey is that before the major economies of the world followed the decisions of the US Federal Reserve. Accordingly, no one raised the stakes particularly. And then a decision was made that had nothing to do with American politics. This can be an example for everyone, even for the Fed leadership. In general, this is a serious event.
Update on US Liquidity situation
In continuation of the topic that the Fed (or Powell personally?) he does not understand how inflation works and why the increase in supply-side costs (including due to de-globalization processes) suddenly does not allow inflation to decrease. I invite everyone to read the speech of the Deputy head of the Federal Reserve Donald Kohn at the 51st economic conference of the Federal Reserve Bank of Boston entitled "The impact of globalization on inflation and their consequences for monetary policy."
In short, back in 2006, they understood the disinflationary effect of globalization on US domestic inflation. Maybe the equations were not formulated and the statistics were not knocked out, but they understood. In general, I bring this to confirm that the Fed knows that current inflation cannot be defeated by raising rates and that a high rate only leads to its retention at a high level, but for some reason it does not reduce it.
Now, back to liquidity... first thing that we have to mention here, and actually already mentioned in Telegram, that It's a tough time for investors again and they have to choose. Because the yield of the main asset classes equalized last week, and now it is the same for treasuries, high-quality corporate bonds and the S&P 500 index.
Since the default risk, at least nominal, is differ for all these assets, everything goes with the plan of US Treasury - investors directly or indirectly but should choose the US bonds that cared minimum risk among all the others. Thus, the likelihood of a massive rebalancing is getting higher. ️Recall that earlier JP Morgan experts predicted a powerful correction in stock markets as part of the rebalancing. The ongoing stock rally will face a new threat over the next few weeks as the world's largest money managers look to divest up to $150 billion worth of stocks, they write.
JPMorgan Chase & Co. forecast that portfolios, including sovereign and pension fund portfolios, will be reallocated to bonds to meet allocation targets, the largest rebalancing to bonds since Q4 2021. Bank experts predict a powerful correction as part of the rebalancing. The ongoing stock rally will face a new threat over the next few weeks as the world's largest money managers look to divest up to $150 billion worth of stocks, they write.
JPMorgan Chase & Co. forecasts that portfolios, including sovereign and pension fund portfolios, will be reallocated to bonds to meet allocation targets, the largest rebalancing to bonds since Q4 2021 . According to JPMorgan strategist Nikolaos Panigirtzoglou, this process could reduce the price of global stocks by as much as 5%.
To be honest, there is no better definition of a bubble - for the first time in history, the yield of cash, bonds and US stocks is at the same level - 5.3%
Assets with different risks are traded with the same yield. It is important to understand here that such an imbalance is a problem in itself. How problematic it was that banks had zero cost of short funding and invested in long-term instruments. Any crisis is built on imbalances of risk and return.
It's about the same. When you buy expensive what is actually cheap - this means that you have an unrealized loss, destroyed value, which will eventually come to the surface in a crisis. Where this world is heading... although it is clear where - it is heading into a full-scale crisis.
Meantime the TGA account (the account of the Ministry of Finance in the Fed) has grown to $ 328 billion, and the reverse repo has stopped shrinking since June 15 and starts growing. Major reasons for that is no auctions for the shortest Treasuries, which are bought by moneymarket funds since then. So someone else bought the long ones.
Experts tell that it would be better to not hurry to draw conclusions about the reduction of liquidity in the market, because we still need to see what happened to bank reserves, to the assets of the Fed, with M2, or rather with M1 (we will not see this soon) in order to understand where the money came from. For now we see that this week Fed assets has dropped for ~ 26 Bln. The Fed sold its assets for a decent amount of $19.4 billion.
In general, in 2-3 weeks it will begin to clear up. But if the Ministry of Finance continues to place long securities, either it will become difficult for the markets, or banks have finally begun to collect long securities against the background of the termination of the Fed rate hike. Or maybe with the hope or understanding of a future rate cut, which will allow them to earn on these treasuries.
I would like to emphasize once again - all thoughts about "where the money comes from" to replenish the account of the Ministry of Finance rest not only on where this money is - in reverse repo, in bank reserves, in a safe in bundles or somewhere else, but also in the actions of the Ministry of Finance, the Fed's rate decisions, regulation and, in fact, the rate on the placed Treasuries in comparison with the current alternative rates.
That is, no unambiguous forecasts "liquidity from the market will go to buy new issues of treasuries and there will be hell" or "new money will come from repo / reserves, etc. and this will be an infusion of liquidity into the system" cannot be given. Too many unknowns, unfortunately.
As you remember, on the eve of raising the debt ceiling, the Ministry of Finance placed mainly short papers for a month. Who bought them? It doesn't matter at all. They were bought by someone who wanted exactly short papers, not long ones. It can be money market funds, for example, or someone else.
If you look at the auction results at the link above, you can see that there are also long paper placements. Those who needed short securities as a conditional analogue of a cache or a short deposit will not buy long ones. Accordingly, when the peak of refinancing of a really large number of short securities that were placed by the Ministry of Finance in late May-early June comes, a significant part of these short securities can be refinanced by long ones. Well, simply because the Ministry of Finance wants to have long-term obligations.
Then what will happen? Then buyers of short securities will say "the number of short securities has fallen, so my alternative with a similar rate, where I can place in a short - reverse repo" and the amount of money in reverse repo with the Fed will grow even more, which means liquidity in the financial system will fall. It is unclear what will happen to the Fed's assets at the same time. They have slowed down now, assets are not declining, but they can, for example, accelerate this deferred sale and also take liquidity from the system.
This is just an illustration to the fact that everything is very uncertain and depends on the actions of the same Ministry of Finance and the Fed. If they want to pass safely, they will pass, if they don't want to, they will fail the system. Sometime on July 7-8, when the data will be released, it will become clear. If something doesn't fall loudly a couple of days before.
Meantime, we see that US banks continue to take money through emergency Fed assistance programs. The total amount of debt now stands at $106 billion.
️Banks' use of the Fed's emergency bank financing program rose again to a new record of $0.8 billion more than last week, while use of the discount window fell by $0.4 billion to $3.2 billion.
For the second week in a row, money market funds record an out flow️. The decline in funds was $18.2 billion, the biggest weekly decline since the week of Christmas 2022. Today these are liquid assets, and tomorrow they are Treasuries, which must be urgently sold. By the way, these are the very notorious $5 trillion that bothered investors. community a year ago, but then everyone was talking about the savings of the population, which were mostly in banks. Now, after the bank fall, trillions have moved to money market funds and many are waiting to be jittered out from there as well. Adventure is no worse than the gold of the Templars.
For this week balance is matched - Fed has sold around 19 Trln while around 18 Trln was out from money market funds. Changes in BTFP programme and Ministry of Finance cash are not significant. To better understand what Fed and US Treasury intends to do, we need to wait when really big new US Bonds issues will be placed, and what will happen then. By far fluctuations look too small.
In general, it can be noted that against the background of the ongoing structural crisis, which is no longer even interesting to comment on, the macroeconomic picture has not changed for many months, the only instrument to maintain the situation is the emission. Either monetary (from the central banks), or credit. Which makes it increasingly dangerous to tighten monetary policy, since it can cause a collapse of defaults, both private and corporate. With the corresponding collapse of financial markets.
Of course, based only on macroeconomic data, it is quite difficult to determine this moment, but the general trend, apparently, can no longer change. It remains to develop compensatory measures and not to panic.
Price action looks very nervous right now. Recall how brave EUR were climbing higher on a background of Fed/ECB decision last week and how fast it has turned down this week. It discovers that investors are not sure with current trend and too sensitive to the news of any kind. EUR upside action, despite it looks fast and solid, but has the lack of safety margin, bringing risks to be over at any moment. Signs of PMI weakness makes investors doubt on EUR performance and ECB decision next time. With such a background the best decision is to go from one definite trading setup to another, without making too extended forecasts into the future.
