Sive Morten
Special Consultant to the FPA
- Messages
- 18,760
Fundamentals
Once again, J. Powell has made this week. Even weaker NFP was not able to overcome him. We suggest that his statement will make long lasting effect because he clearly said that there will be no new rate hike any time soon. This sounds logical. Inflation stands high, economy is dropping for ~6-8% per year and another 0.25% hike will make mostly media effect only and make happy only speculators rather than seriously impact on inflation. But the opposite measures, what is the real interest - slowing QT and US Treasury bonds buyback announcement.
Second moment is Japan. In recent weeks I've got a few PM's with questions concerning JPY and Japan economy in general. So, this is really big topic and actually deserves a separate report. But, since not too many our forum members actively trade JPY I decide to cover this topic in this report briefly, but considering all major moments.
If report appears to be too large I will move some topics to gold report just to split information equally and not making FX report too heavy. So, let's get started with it...
Market overview
A gauge of global stocks fell on Wednesday while the dollar weakened against a basket of peers after the Federal Reserve left interest rates unchanged and indicated it is still leaning toward eventual rate cuts.But the U.S. central bank put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement toward more balance in the economy. The Fed also announced plans to slow the speed of its balance sheet drawdown, after having spent much of the earlier part of the year warning of such a shift.
Earlier, data from the ADP Employment report showed U.S. private payrolls increased more than expected in April while data for the prior month was revised higher.
But a separate report from the Bureau of Labor Statistics in its Job Openings and Labor Turnover Survey, or JOLTS, showed U.S. job openings fell to a three-year low in March, while the number of people quitting their jobs declined - indications of easing labor market conditions that could potentially aid the Fed in its fight against inflation. Although official numbers of jobs are exceed of job seekers, this ratio is gradually decreasing -
Other data from the Institute for Supply Management pointed to continued sluggishness in U.S. manufacturing, which contracted in April amid a decline in orders after briefly expanding in the prior month. Markets have continued to dial back expectations for the timing and amount of rate cuts from the central bank this year, as inflation has proven to be sticky and the labor market remains on solid footing. After the policy statement, traders added to bets that the Fed will cut rates this year, likely in November.
The Fed said that starting on June 1 it will reduce the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month. While the drawdown thus far has not had much of a market impact, the latest shift might at the margins. The downshift in QT "has the serendipitous effect of putting some downward pressure on yields, mitigating the risk of a push upwards towards 5%," said analysts at Evercore ISI.
Options on Secured Overnight Financing Rate (SOFR) futures are showing a higher probability that the Federal Reserve could hike interest rates a quarter percentage point this year and next as U.S. inflation and the labor market remain resilient. Bond investors look to SOFR futures, among other indicators, to gauge expectations on Fed policy rates. SOFR, currently at 5.31% , measures the cost of borrowing cash overnight in money markets collateralized by U.S. Treasuries. It is the benchmark rate used to price dollar-denominated derivatives and loans.
Odds for a rise in SOFR are low, though not insignificant. Few market participants actually expect the Fed to hike again. It could well be that the Fed cuts rates just once this year or not at all, and hold them higher for longer. The option-implied probability for SOFR to rise 25 basis points to 5.56% by December has risen to 29%, Barclays estimates showed, from about 26% in early April. The prospect of a no-cut scenario for 2024 is 31%, up from 20% a month ago, BNP Paribas data showed.
A growing number of Federal Reserve officials don't see a return to the ultra-low interest rates that prevailed before the COVID-19 pandemic due to everything from ballooning federal deficits to demand for investments in green energy, artificial intelligence and domestic manufacturing. Dallas Fed President Lorie Logan, speaking in April, noted seven policymakers saw a longer-run policy rate of 3%, up from three with that view a year ago. Fed officials aren't the only ones wondering if it may be higher. A New York Fed survey of major banks ahead of the March meeting found dealers estimating a longer-run rate of nearly 3%, up from 2.5% the prior March.
Meantime the dollar fell to a three-week low against the yen on Friday after data showed U.S. jobs growth slowed more than expected in April and annual wage gains cooled, boosting bets that the Federal Reserve will cut rates twice this year. Employers added 175,000 jobs last month, below economists' expectations for a 243,000 increase. Wages increased 3.9% in the 12 months through April, below expectations for a 4.0% gain after rising 4.1% in March. The unemployment rate rose to 3.9% from 3.8%, remaining below 4% for the 27th straight month.
Other data on Friday showed the U.S. services sector contracted in March, while a measure of prices paid by businesses for inputs jumped, a worrisome sign for the inflation outlook.
U.S. consumers are in focus as the University of Michigan's preliminary reading on consumer sentiment in May gives a snapshot of their inflation expectations and economic outlook. Months of stubborn inflation have threatened to disrupt the so-called Goldilocks narrative of resilient growth and cooling consumer prices that have helped drive stocks higher.Any signs in the May 10 report that higher prices are weighing on sentiment could encourage the Fed to keep rates elevated, adding to recent pressure on stocks and bonds. Economists polled by Reuters expect the consumer sentiment index to rise to 77.9 from 77.2 in April.
SHORTLY ON JAPAN
So, I'll try to make it short and will not post here news, BoJ statements and other stuff that you could read in the net by yourself. We're going directly to analysis and explanation of why Japan is in a deep hole. To understand it better - recall that Japan has two times greater Debt/GDP ratio that the US and very special structure of domestic bond market, where the majority of debt stands on the BoJ balance, i.e. belongs to the government.
While the Japanese authorities threaten currency interventions, the market ignores and continues to drain the yen. Because everyone knows that currency interventions by themselves do not reverse trends, they only put out the fire and let steam out from the boiling pot. Moreover, inflation in Japan, with a zero rate, was already 3.2% in 2023, and then the exchange rate is falling, so it definitely won’t get lower.
What could really reverse the trend is raising the rate by at least 1%, or even 2-3%, taking into account the fact that the Fed does not plan to lower the rate voluntarily. That is, it is necessary to direct financial flows back. But the inflows of some are the outflows of others, so the profitability of treasuries, taking into account the trillion-dollar positive investment position of the Japanese, will definitely go up, which means the holes in the balance sheets of American banks will grow.
In general, In this case (if Japan will raise the rate) the softening of market financial conditions in the US will turn into an even stronger tightening (because capitals will flow to Japan, draining liquidity out of the US market) than the slowdown in the US economy, which means hello, recession. Well, or inflation, if they decide to keep the economy from falling at any cost, by printing money.
But the intervention, apparently, has taken place. Although it didn't help. The market rejoiced at the opportunity to sell the yen at a higher price and continued the JPY sell-off. Meantime BoJ has burned around $60 Bln. This is very big amount. This is a lot and exceeds everything that was done in 2022. But this is mostly offset by the Bank of Japan's (blue) monthly purchases of JGBs, which weakens the yen. Japan is literally trading against itself.
In theory, the Central Bank can borrow dollars from the Fed through swaps, but this cannot continue without limits, because fundamentally everything suggests that the yen should go down. Will exports rise on a weak yen? Let us suppose. But limited until it runs into capacity limits. It is impossible to make Large-scale investments in production with high inflation, which will grow more because of weak yen and growing expensive exports, as well as long-term commercial debt. So the rate will have to be raised.
IIF Chief Economist Robin Brooks tells the same:
The Economists repeats the same thoughts -
You probably get an idea and why I'm very careful in any forecasts and judgements concerning JPY. There is no simple solution to the problem and it mostly stands in political sphere. What Japan can't afford, due to the political situation, is to honestly voice the consequences of changes in interest rate policy by the Central Bank of Japan for the world economy and, in particular, for the global financial system. Because if Japan stops pumping money into the world financial system and starts sucking it back, everything could collapse. The delights of the liquidity crisis in the current conditions will appear in all their glory. Especially considering the accompanying decline in US Treasuries prices.
And they probably have tried to do this. Because recently J. Biden calls US ally Japan ‘xenophobic’ along with India, Russia and China. Japan is better off in the Eurasian Economic Zone. Biden himself is giving them bold hints. And it’s not for nothing that they want to reverse the US Steel deal. All that remains is for them to get rid of the central bank subordinate to the Fed, which may then be followed by a squeeze or, let’s say, a forced disposal of Japanese assets in the United States, and then there will be no choice left. And it’s not without reason that AUKUS didn’t hire them. Japanese are resisting being an anti-Chinese battering ram.
In a such environment you can't make any bets on JPY trend reversal, hoping just on interventions and suggesting that the yen has fell too strong. JPY can't raise rate by two reasons - too large debt which will trigger inflation and possible competition with the US Dollar. If they will not raise rate - JPY will keep falling. I do not see any scenario where the US agrees with capital outflows back to Japan. That's why personally I try to escape trading it because it is highly politicized. If you still like it - think twice before make any bets on JPY reversal. As we've explained economical and political background give no chances by far that temporal strength could get more or less stable background.
Back to the US problems
Once again everything is twisting and turning around the US National debt and the Fed policy. Based on recent data - it seems that they have chosen the way of policy easing, accelerating inflation and postponing rate cut. It means that market will be deceived by this policy and EUR/USD downside trend should remain. Why? Because by starting a kind of QE financial markets will get the boost, making image of growth while real problems will keep accumulating under cover of the "picture of success".
Everybody will be seeing only this wrap, that will keep looking good, and not signing inner content. Inflation will keep raising, getting support not only from external factors but also due inner fiscal policy. It will be twofold - first is the Fed cuts QT programme sharply from 65 Bln to just 25 Bln per month. Second is, US Treasury starts buyback programme. Now it looks small, just 15 Bln, but this is only for two months by far. Also do not forget that J. Yellen has got 250 Bln of Taxes, accumulated on TGA account which also will be spend, as they said, to "Stabilize yields volatility". In common language it means to "hold yields from raising". In two words it calls as "Burning reserves".
Yellen recently said that she is concerned with raising budget deficit. Consequently they will search chances how to cut it. Raising taxes or issue new debt to finance the budget deficit look as a bad idea, as it will negatively impact on consumption and increase inflation. Based on the measures that they have announced, it seems they intend to "inflate" existing debt and devaluate the real value the deficit.
it means there is the only way - drop the real Fed rate below zero in order to pay zero on treasuries (in real term) and at least reduce the deficit for these expenses? There are already not enough stimulus for the private sector, so everyone will rejoice. Only inflation will clearly not fall, but will rise. But this is also good. There are no other options for inflating the national debt. And the investment cycle in the real economy, including infrastructure renewal, can only be restarted this way. Speaking shortly - they decide to delay collapse as long as possible with all tools that they have, but keep the appearance of "Strong economy", which we've discussed last week.
QE with the high rate is a kind of break and throttle pedals pushed together. When you're on a straight way - it is nonsense, but if you're drifting it makes sense. The major question here is where you're drifting to. Debt at 200-300% we could see in Japan and so what? People are living, economy is working... by far. You always could forget it. Yes, it will trigger inflation, consumption collapse, big amount of cash on the hands that is nowhere to invest, except commodities and real assets maybe.
At first glance, US Treasury has announced decreasing of borrowing in IIQ and the volume of net borrowings for 2Q24 is planned to be about 243 billion, which is three times less than last year. Besides, they have ~$900Bln of cash on TGA account. Taking it together they have enough reserves to close the deficit in 2024.
In May-June net borrowings may exceed 350 billion, but this is not too much, but the main problems will begin in July 2024. Given the Fed and Treasury operations, the complete depletion of the reverse repo could occur around July 20 to August 20. In 3Q24, the Ministry of Finance plans to borrow 847 billion, which is a record load on the system for this time of year.
In addition to this, placements of medium-term and long-term debt will increase sharply starting in May 2024, which will inevitably raise rates and exacerbate the disposition in the US debt market. The turning point is June 2024, then the problems will begin to escalate at a very rapid pace.
The load on the debt market will increase by 3.5 times against the backdrop of a general reduction in liquidity at all levels (financial sector and households) - this is the strongest stress test on the system over the past 15 years.
HOW THE NEW FED/TREASURY STRATEGY WILL LOOK LIKE
What they will try to hide and what they try to show in front? Obviously they need to disguise problems and keep the picture of strong economy, hiding deterioration in all spheres drop of the sentiment and consumption. It means that they will not take any hawkish steps any more. At the same time - major data that we see hardly will become better. Fundamentally the US economy will keep dropping and following the common sense dollar should start falling, but here different mechanism works, when fiscal dominates over fundamental. Here is what we already have:
We will not see any improvement in particular data, but common indicators such as GDP will stay positive because pumped liquidity will support financial markets, making an illusion of growth. There are few interesting observations concerning Chicago PMI and Consumer Confidence which show that situation even worse.
Rising energy prices, coupled with the ongoing recovery in the manufacturing sector, make it more likely that we'll see higher commodity inflation in the coming months, analysts say. All Powell had to do was not talk at the last meetings at the end of last year, so as not to create expectations for a quick rate cut and easing of financial conditions...
There was a very curious question from the audience, which was ignored by all the world's media: "how did the softening of financial conditions since November affect the acceleration of inflation in early 2024?"
Powell's said : "We do not know if there is an obvious connection with the weakening of financial conditions since December in the context of the acceleration of inflation."
In reality, the QT squeeze is directly related to the liquidity balance and depletion of excess liquidity in the system – an absolutely transparent logic that the Fed is masking for some reason."
Thus, they will not cut rate either, at least until J. Powell will get direct order from the top, and will use reserves to keep the image of "Strength" and " Success", increasing stimulus by cutting QT and starting buybacks and burning cash to keep hold rates relatively stable. All these moments definitely will decieve investors that will be assured with stabilization of economy, its strength and possible rate cut. Also they definitely will try all possible ways to avoid big jumps in official statistics.
There are some other moments exist concerning this subject but let's discuss it tomorrow in Gold report. Things that we already have said are enough to make some conclusion.
Once again, J. Powell has made this week. Even weaker NFP was not able to overcome him. We suggest that his statement will make long lasting effect because he clearly said that there will be no new rate hike any time soon. This sounds logical. Inflation stands high, economy is dropping for ~6-8% per year and another 0.25% hike will make mostly media effect only and make happy only speculators rather than seriously impact on inflation. But the opposite measures, what is the real interest - slowing QT and US Treasury bonds buyback announcement.
Second moment is Japan. In recent weeks I've got a few PM's with questions concerning JPY and Japan economy in general. So, this is really big topic and actually deserves a separate report. But, since not too many our forum members actively trade JPY I decide to cover this topic in this report briefly, but considering all major moments.
If report appears to be too large I will move some topics to gold report just to split information equally and not making FX report too heavy. So, let's get started with it...
Market overview
A gauge of global stocks fell on Wednesday while the dollar weakened against a basket of peers after the Federal Reserve left interest rates unchanged and indicated it is still leaning toward eventual rate cuts.But the U.S. central bank put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement toward more balance in the economy. The Fed also announced plans to slow the speed of its balance sheet drawdown, after having spent much of the earlier part of the year warning of such a shift.
Earlier, data from the ADP Employment report showed U.S. private payrolls increased more than expected in April while data for the prior month was revised higher.
But a separate report from the Bureau of Labor Statistics in its Job Openings and Labor Turnover Survey, or JOLTS, showed U.S. job openings fell to a three-year low in March, while the number of people quitting their jobs declined - indications of easing labor market conditions that could potentially aid the Fed in its fight against inflation. Although official numbers of jobs are exceed of job seekers, this ratio is gradually decreasing -
Other data from the Institute for Supply Management pointed to continued sluggishness in U.S. manufacturing, which contracted in April amid a decline in orders after briefly expanding in the prior month. Markets have continued to dial back expectations for the timing and amount of rate cuts from the central bank this year, as inflation has proven to be sticky and the labor market remains on solid footing. After the policy statement, traders added to bets that the Fed will cut rates this year, likely in November.
The Fed said that starting on June 1 it will reduce the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month. While the drawdown thus far has not had much of a market impact, the latest shift might at the margins. The downshift in QT "has the serendipitous effect of putting some downward pressure on yields, mitigating the risk of a push upwards towards 5%," said analysts at Evercore ISI.
Options on Secured Overnight Financing Rate (SOFR) futures are showing a higher probability that the Federal Reserve could hike interest rates a quarter percentage point this year and next as U.S. inflation and the labor market remain resilient. Bond investors look to SOFR futures, among other indicators, to gauge expectations on Fed policy rates. SOFR, currently at 5.31% , measures the cost of borrowing cash overnight in money markets collateralized by U.S. Treasuries. It is the benchmark rate used to price dollar-denominated derivatives and loans.
Odds for a rise in SOFR are low, though not insignificant. Few market participants actually expect the Fed to hike again. It could well be that the Fed cuts rates just once this year or not at all, and hold them higher for longer. The option-implied probability for SOFR to rise 25 basis points to 5.56% by December has risen to 29%, Barclays estimates showed, from about 26% in early April. The prospect of a no-cut scenario for 2024 is 31%, up from 20% a month ago, BNP Paribas data showed.
A growing number of Federal Reserve officials don't see a return to the ultra-low interest rates that prevailed before the COVID-19 pandemic due to everything from ballooning federal deficits to demand for investments in green energy, artificial intelligence and domestic manufacturing. Dallas Fed President Lorie Logan, speaking in April, noted seven policymakers saw a longer-run policy rate of 3%, up from three with that view a year ago. Fed officials aren't the only ones wondering if it may be higher. A New York Fed survey of major banks ahead of the March meeting found dealers estimating a longer-run rate of nearly 3%, up from 2.5% the prior March.
Meantime the dollar fell to a three-week low against the yen on Friday after data showed U.S. jobs growth slowed more than expected in April and annual wage gains cooled, boosting bets that the Federal Reserve will cut rates twice this year. Employers added 175,000 jobs last month, below economists' expectations for a 243,000 increase. Wages increased 3.9% in the 12 months through April, below expectations for a 4.0% gain after rising 4.1% in March. The unemployment rate rose to 3.9% from 3.8%, remaining below 4% for the 27th straight month.
Other data on Friday showed the U.S. services sector contracted in March, while a measure of prices paid by businesses for inputs jumped, a worrisome sign for the inflation outlook.
U.S. consumers are in focus as the University of Michigan's preliminary reading on consumer sentiment in May gives a snapshot of their inflation expectations and economic outlook. Months of stubborn inflation have threatened to disrupt the so-called Goldilocks narrative of resilient growth and cooling consumer prices that have helped drive stocks higher.Any signs in the May 10 report that higher prices are weighing on sentiment could encourage the Fed to keep rates elevated, adding to recent pressure on stocks and bonds. Economists polled by Reuters expect the consumer sentiment index to rise to 77.9 from 77.2 in April.
SHORTLY ON JAPAN
So, I'll try to make it short and will not post here news, BoJ statements and other stuff that you could read in the net by yourself. We're going directly to analysis and explanation of why Japan is in a deep hole. To understand it better - recall that Japan has two times greater Debt/GDP ratio that the US and very special structure of domestic bond market, where the majority of debt stands on the BoJ balance, i.e. belongs to the government.
While the Japanese authorities threaten currency interventions, the market ignores and continues to drain the yen. Because everyone knows that currency interventions by themselves do not reverse trends, they only put out the fire and let steam out from the boiling pot. Moreover, inflation in Japan, with a zero rate, was already 3.2% in 2023, and then the exchange rate is falling, so it definitely won’t get lower.
What could really reverse the trend is raising the rate by at least 1%, or even 2-3%, taking into account the fact that the Fed does not plan to lower the rate voluntarily. That is, it is necessary to direct financial flows back. But the inflows of some are the outflows of others, so the profitability of treasuries, taking into account the trillion-dollar positive investment position of the Japanese, will definitely go up, which means the holes in the balance sheets of American banks will grow.
In general, In this case (if Japan will raise the rate) the softening of market financial conditions in the US will turn into an even stronger tightening (because capitals will flow to Japan, draining liquidity out of the US market) than the slowdown in the US economy, which means hello, recession. Well, or inflation, if they decide to keep the economy from falling at any cost, by printing money.
But the intervention, apparently, has taken place. Although it didn't help. The market rejoiced at the opportunity to sell the yen at a higher price and continued the JPY sell-off. Meantime BoJ has burned around $60 Bln. This is very big amount. This is a lot and exceeds everything that was done in 2022. But this is mostly offset by the Bank of Japan's (blue) monthly purchases of JGBs, which weakens the yen. Japan is literally trading against itself.
In theory, the Central Bank can borrow dollars from the Fed through swaps, but this cannot continue without limits, because fundamentally everything suggests that the yen should go down. Will exports rise on a weak yen? Let us suppose. But limited until it runs into capacity limits. It is impossible to make Large-scale investments in production with high inflation, which will grow more because of weak yen and growing expensive exports, as well as long-term commercial debt. So the rate will have to be raised.
IIF Chief Economist Robin Brooks tells the same:
The Economists repeats the same thoughts -
You probably get an idea and why I'm very careful in any forecasts and judgements concerning JPY. There is no simple solution to the problem and it mostly stands in political sphere. What Japan can't afford, due to the political situation, is to honestly voice the consequences of changes in interest rate policy by the Central Bank of Japan for the world economy and, in particular, for the global financial system. Because if Japan stops pumping money into the world financial system and starts sucking it back, everything could collapse. The delights of the liquidity crisis in the current conditions will appear in all their glory. Especially considering the accompanying decline in US Treasuries prices.
And they probably have tried to do this. Because recently J. Biden calls US ally Japan ‘xenophobic’ along with India, Russia and China. Japan is better off in the Eurasian Economic Zone. Biden himself is giving them bold hints. And it’s not for nothing that they want to reverse the US Steel deal. All that remains is for them to get rid of the central bank subordinate to the Fed, which may then be followed by a squeeze or, let’s say, a forced disposal of Japanese assets in the United States, and then there will be no choice left. And it’s not without reason that AUKUS didn’t hire them. Japanese are resisting being an anti-Chinese battering ram.
In a such environment you can't make any bets on JPY trend reversal, hoping just on interventions and suggesting that the yen has fell too strong. JPY can't raise rate by two reasons - too large debt which will trigger inflation and possible competition with the US Dollar. If they will not raise rate - JPY will keep falling. I do not see any scenario where the US agrees with capital outflows back to Japan. That's why personally I try to escape trading it because it is highly politicized. If you still like it - think twice before make any bets on JPY reversal. As we've explained economical and political background give no chances by far that temporal strength could get more or less stable background.
Back to the US problems
Once again everything is twisting and turning around the US National debt and the Fed policy. Based on recent data - it seems that they have chosen the way of policy easing, accelerating inflation and postponing rate cut. It means that market will be deceived by this policy and EUR/USD downside trend should remain. Why? Because by starting a kind of QE financial markets will get the boost, making image of growth while real problems will keep accumulating under cover of the "picture of success".
Everybody will be seeing only this wrap, that will keep looking good, and not signing inner content. Inflation will keep raising, getting support not only from external factors but also due inner fiscal policy. It will be twofold - first is the Fed cuts QT programme sharply from 65 Bln to just 25 Bln per month. Second is, US Treasury starts buyback programme. Now it looks small, just 15 Bln, but this is only for two months by far. Also do not forget that J. Yellen has got 250 Bln of Taxes, accumulated on TGA account which also will be spend, as they said, to "Stabilize yields volatility". In common language it means to "hold yields from raising". In two words it calls as "Burning reserves".
Yellen recently said that she is concerned with raising budget deficit. Consequently they will search chances how to cut it. Raising taxes or issue new debt to finance the budget deficit look as a bad idea, as it will negatively impact on consumption and increase inflation. Based on the measures that they have announced, it seems they intend to "inflate" existing debt and devaluate the real value the deficit.
it means there is the only way - drop the real Fed rate below zero in order to pay zero on treasuries (in real term) and at least reduce the deficit for these expenses? There are already not enough stimulus for the private sector, so everyone will rejoice. Only inflation will clearly not fall, but will rise. But this is also good. There are no other options for inflating the national debt. And the investment cycle in the real economy, including infrastructure renewal, can only be restarted this way. Speaking shortly - they decide to delay collapse as long as possible with all tools that they have, but keep the appearance of "Strong economy", which we've discussed last week.
QE with the high rate is a kind of break and throttle pedals pushed together. When you're on a straight way - it is nonsense, but if you're drifting it makes sense. The major question here is where you're drifting to. Debt at 200-300% we could see in Japan and so what? People are living, economy is working... by far. You always could forget it. Yes, it will trigger inflation, consumption collapse, big amount of cash on the hands that is nowhere to invest, except commodities and real assets maybe.
At first glance, US Treasury has announced decreasing of borrowing in IIQ and the volume of net borrowings for 2Q24 is planned to be about 243 billion, which is three times less than last year. Besides, they have ~$900Bln of cash on TGA account. Taking it together they have enough reserves to close the deficit in 2024.
In May-June net borrowings may exceed 350 billion, but this is not too much, but the main problems will begin in July 2024. Given the Fed and Treasury operations, the complete depletion of the reverse repo could occur around July 20 to August 20. In 3Q24, the Ministry of Finance plans to borrow 847 billion, which is a record load on the system for this time of year.
In addition to this, placements of medium-term and long-term debt will increase sharply starting in May 2024, which will inevitably raise rates and exacerbate the disposition in the US debt market. The turning point is June 2024, then the problems will begin to escalate at a very rapid pace.
The load on the debt market will increase by 3.5 times against the backdrop of a general reduction in liquidity at all levels (financial sector and households) - this is the strongest stress test on the system over the past 15 years.
HOW THE NEW FED/TREASURY STRATEGY WILL LOOK LIKE
What they will try to hide and what they try to show in front? Obviously they need to disguise problems and keep the picture of strong economy, hiding deterioration in all spheres drop of the sentiment and consumption. It means that they will not take any hawkish steps any more. At the same time - major data that we see hardly will become better. Fundamentally the US economy will keep dropping and following the common sense dollar should start falling, but here different mechanism works, when fiscal dominates over fundamental. Here is what we already have:
We will not see any improvement in particular data, but common indicators such as GDP will stay positive because pumped liquidity will support financial markets, making an illusion of growth. There are few interesting observations concerning Chicago PMI and Consumer Confidence which show that situation even worse.
Rising energy prices, coupled with the ongoing recovery in the manufacturing sector, make it more likely that we'll see higher commodity inflation in the coming months, analysts say. All Powell had to do was not talk at the last meetings at the end of last year, so as not to create expectations for a quick rate cut and easing of financial conditions...
There was a very curious question from the audience, which was ignored by all the world's media: "how did the softening of financial conditions since November affect the acceleration of inflation in early 2024?"
Powell's said : "We do not know if there is an obvious connection with the weakening of financial conditions since December in the context of the acceleration of inflation."
In reality, the QT squeeze is directly related to the liquidity balance and depletion of excess liquidity in the system – an absolutely transparent logic that the Fed is masking for some reason."
Thus, they will not cut rate either, at least until J. Powell will get direct order from the top, and will use reserves to keep the image of "Strength" and " Success", increasing stimulus by cutting QT and starting buybacks and burning cash to keep hold rates relatively stable. All these moments definitely will decieve investors that will be assured with stabilization of economy, its strength and possible rate cut. Also they definitely will try all possible ways to avoid big jumps in official statistics.
There are some other moments exist concerning this subject but let's discuss it tomorrow in Gold report. Things that we already have said are enough to make some conclusion.
Last edited:
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