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Everything as before. The mountain of fed gave birth to the mouse facing forward, playing the magician’s card with no open perception repertoire of his new course of stimulating the economy. The new, however, is not.
At the end of the two-day Monetary Committee, in fact, the Federal Reserve confirmed the current value of 120 billion in monthly purchases of securities (80 in Treasury, 40 in Mbs) and has included in its final document the intention to maintain at least this level “until there is a return to full employment and an inflation rate of around 2%».
The market, however, had a different price. First, what JP Morgan defined as the intermediate step before the increase in the amount of purchases, scheduled for the spring: elongation of maturity of the debt securities acquired. Second, precisely a increased firepower, at least as regards the 80 billion government bonds, given that some voices within the Council had cleverly leaked the fear before the meeting that an increase in the level of MBS purchases could create problems for the real estate market .
However, none of this. But, paradoxically, the Fed was able to play a transitional poker hand, at least taking time in this moment of double tension between start of the vaccination campaign and waiting for theofficial Joe Biden deal January 20. Anyway, Merry Christmas everyone, the Fed does not simply abandon the market. But at the same time, you can’t afford the fireworks.
The why represents a sum of criticalities, all although temporarily obscured by that generic formula linked to the times and methods of Qe – up to further substantial progress – and at least two goal assists received on the eve of the final communications.
First, the apparent agreement in Congress for a new $ 900 billion federal economic support package to counter the second wave of Covid, indeed a topic of discussion worthy of a political version of Waiting for Godot that, by chance, yesterday I myself would have found an unexpected-lightning solution (all to be verified in fact, already today). Second and most important, this graph shows us:
Source: Bloomberg / Zerohedge
To avoid an oversized reaction from Wall Street in the last trading hour, we thought about what happened overnight in China, when the Cantrale banking (Pboc), after a week of continuous losses in market liquidity that had raised fears of a new season of monetary rigor by order of Xi Jinping, instead injected 950 billion yuan into the system ($ 145 billion) in medium-term loans, “to keep the banking system with ample liquidity“Translated, Beijing has once again founded the world with its credit boost. The reason? As reported by Reuters, cancellations of bond issuances broke out mostly by entities linked to local governments, the most in need of financing but also those most affected by the market tension immediately triggered by the drains of the last days. In short, paradoxically China’s domestic bond market troubles proved to be the perfect alibi for the Fed., to be able to sell almost hot air and a stagnation without causing index hits. In short, another kick in the jar. In the hope that the federal stimulus and vaccination campaign can sustain the market until at least early spring, while limiting the rise in real GDP forecasts in 2021 to 4.2% from 4% previously.
The snow melted, however, the market will no longer be satisfied with the talk. And something will have to be done. And here some of the critical issues on the plate that Jerome powell they allowed themselves the luxury of not offering answers or prescriptions but that, after the holidays or the first pull in Congress or in the storage / distribution of the vaccine (which already happened yesterday in California and Alabama, where four shipments of 3,900 Pfizer too frozen and therefore unusable), it will need to be examined. Drastically.
Source: JP Morgan
In fact, this first chart shows how for the strategists at JP Morgan, the G4 central bank balance sheets should rise another whopping 4 trillion by December 2022, to reach 29.3 trillion. In fact, the minimum wage for avoid the derailment of a stock market that globally has just reached 100 trillion market capitalization and that, at least twice in the last year, has shown that it depends entirely on a structural logic Qe. And with debt issues for 2021 in the US doubling in monthly value compared to what the Fed can monetize through its current amount of purchases, it seems obvious to believe that the increase in purchases of Treasuries from 80 to 160 billion proposed by JP Morgan for next spring come true. And what could the “guarantee” to Jerome Powell green light for program extension, in addition to the possible operational failure of the two bullish catalysts of the congressional agreement and the massive vaccine?
These three graphs show it:
Fyesterday: Bank of America
Source: Bloomberg
Source: Bloomberg
The first tells us how the bullish euphoria on Wall Street, driven to a climax by the new IPO promoter, just did it. take a sell sign in the Bank of America tracker, the same one that was taken last February and that anticipated the drastic correction of the following month. Precisely what led the Fed to officially return to the field, after the autumn “appearance” to cushion the explosion of spreads in the interbank repo market.
The other two seem, paradoxically, even more intuitive: not only that smart money has further ditched ship, right in the middle of the record IPO celebrations, but here another precedent is revealed in the eyes of analysts as a haunting memory. And a perspective of déjà vu that could incinerate the securities accounts of a few hundred thousand daily traders, currently capable of moving 30% of the daily trading volume.
Finally, these last two charts seem to offer a further explanation of the Fed board’s caution.
Source: Bloomberg / Knowlege Leaders Capital
Source: Bank of America
Despite the fact that the official CPI index reading continues to report total absence of inflation, the 2-year breakeven point continues to rise, a trend that certainly does not advocate for expansion sine qua non of monetary availability, from today in the area of 1.81%. Level not far from the goal that Jerome Powell just reiterated and that would require a first reduction of the support program. And if the bond market appears to confirm a flat calm outlook on the performance front, the record percentage of 76% of fund managers surveyed by Bank of America expect a sharp increase in yields, superior to what has been experienced in recent times that changed the rules of the game, such as the Lehman collapse of 2008 or the Taper tantrum provoked by Ben Bernanke in 2013 or the 2016 presidential election with the shocking victory of Donald Trump.
It goes without saying that, from that level, the possible flattening of that curve would leave the Stalingrad-style dead and injured on the ground.
In short, the Fed went into hiding. And above all, he tried to hide under the rug of dissimulation the tensions that are beginning to emerge under the radar. But he betrays himself in the final: why extending the swap lines and repurchase facilities with the other central banks until September 2021, as reported, seems to be a precautionary measure that closely resembles fear of a imminent contraction of dollar liquidity. Which requires immediate support. Everything just postponed, in short. But the clouds on the horizon are getting closer. More and more black.
