Fed Cuts: Accommodative?
On August 1st we Nattered to a friend...
The 25bps cuts to FFR, IOER, ONRRP and cessation of QT "rollover", actually tightened. Lower rates will put additional pressure on already compressed NIMS.
As opposed to the pre QE storing of liquidity, the commercial banks now purchase their liquidity viz pay for something they already own. (Shout out to ST, a mentor.)
Under theory, lower IOER and ONRRP remuneration might drive those participants to seek alternate uses for "liquidity" savings viz lowering risk free arbs may cause a shifting of funds?
Witness immediately following the cuts, some elephants were forced to take a big fat "shift" on the 1st, 2nd and 5th. Global markets roiled to the downside with NQ futures dropping from 8050 to 7224 in less than three trading days, do the math.
Due to the Fed "cuts" further abandonment of market making or disintermediation affect, coupled with the budget resolutions need ($1T deficit) for growing UST issuance and TGA restock between now and year end, and cessation of balance sheet roll off = even more tightening.
Less roll off and greater FOMC reinvestment means less supply. Additional bonds for sale should more than counterbalance that factor. Bonds which are bought at auction?
US dollars are the only thing you can buy them with, and those dollars get siphoned out of the money supply. Less dollars for circulation, higher dollar, less dollars for liquidity and market making, tightening, higher dollar. Rinse and repeat.
Long term yields should drop further, quarter end rucks will cause short duration funding cost spikes (cost of loan funds), especially in September (think in anticipation of Chinese banks closing for golden week Oct 1st) and year end (think Chinese New Year, month, quarter and year end window dressing).
More to come? A technical rally would not surprise, but could be just a small bump on the way down a long road. All TBD in a thinly traded August.
To summarize: For the growth trend, short term danger is likely to translate into longer term economic malaise.
Seasonal monetary flow factors were already set to collapse into the 2nd half. Additional liquidity drains: TGA restock, $1T UST issuance by YE; tariffs Sept 1st (purchasing power).
Unless lower IOER, ONRRP stir some money into play, rather than cause further disintermediation, less liquidity in market making, a Lehman or Minsky moment potentially awaits?
Bottom line, the Fed cuts tightened and the ruck is on, as liquidity is and will be at a premium, until after year end. As one not so large counterparty failure could cascade ala Lehman, Caveat Emptor.
In 2017 NET [Treasury] issuance 537B; 2018 $1.1T;
2019: End of June $264B cash balance, net issuance YTD 299B, estimated actual financing needs by year end: 970B; between July and Dec 31st: est $814B GROSS issuance, net TBD. See TBAC announcements for further edification.
Factor in: FFR cut -25bps to 2.25%; IOER cut -25bps to 2.10%, ON RRP cut -25bps to 2%; Along with a termination of runoff and a huge change in rollover's. The 10 just dipped below 2%.Plunging further, the 10 year yield hit 1.53% during trading last Wednesday August 7th. Further Nattering and musing on July 31st FOMC "cut" and Congressional budget resolution...
The 25bps cuts to FFR, IOER, ONRRP and cessation of QT "rollover", actually tightened. Lower rates will put additional pressure on already compressed NIMS.
As opposed to the pre QE storing of liquidity, the commercial banks now purchase their liquidity viz pay for something they already own. (Shout out to ST, a mentor.)
Under theory, lower IOER and ONRRP remuneration might drive those participants to seek alternate uses for "liquidity" savings viz lowering risk free arbs may cause a shifting of funds?
Witness immediately following the cuts, some elephants were forced to take a big fat "shift" on the 1st, 2nd and 5th. Global markets roiled to the downside with NQ futures dropping from 8050 to 7224 in less than three trading days, do the math.
Due to the Fed "cuts" further abandonment of market making or disintermediation affect, coupled with the budget resolutions need ($1T deficit) for growing UST issuance and TGA restock between now and year end, and cessation of balance sheet roll off = even more tightening.
Less roll off and greater FOMC reinvestment means less supply. Additional bonds for sale should more than counterbalance that factor. Bonds which are bought at auction?
US dollars are the only thing you can buy them with, and those dollars get siphoned out of the money supply. Less dollars for circulation, higher dollar, less dollars for liquidity and market making, tightening, higher dollar. Rinse and repeat.
Long term yields should drop further, quarter end rucks will cause short duration funding cost spikes (cost of loan funds), especially in September (think in anticipation of Chinese banks closing for golden week Oct 1st) and year end (think Chinese New Year, month, quarter and year end window dressing).
More to come? A technical rally would not surprise, but could be just a small bump on the way down a long road. All TBD in a thinly traded August.
To summarize: For the growth trend, short term danger is likely to translate into longer term economic malaise.
Seasonal monetary flow factors were already set to collapse into the 2nd half. Additional liquidity drains: TGA restock, $1T UST issuance by YE; tariffs Sept 1st (purchasing power).
Unless lower IOER, ONRRP stir some money into play, rather than cause further disintermediation, less liquidity in market making, a Lehman or Minsky moment potentially awaits?
Bottom line, the Fed cuts tightened and the ruck is on, as liquidity is and will be at a premium, until after year end. As one not so large counterparty failure could cascade ala Lehman, Caveat Emptor.
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