Notes From Underground

Just as Saudi Arabia was becoming less of a story the NEW YORK FED‘s mishandling of Tuesday’s repo operation has created a new round of angst for traders if not investors. The best coverage on the FED‘s recent efforts to calm the overnight funding markets (and repo turmoil) has been done by Liz Capo McCormick and Alex Harris at Bloomberg News. Now they have another article out discussing another REPO operation tomorrow morning.

Tuesday’s operation injected $53 billion of liquidity, even though $75 billion was on offer. While the FUNDS level went as high as 10% today the repo operation brought the level down to 2.50% to 2.25%, calming fears of any type of solvency/liquidity situation. Even though we’re around the 11th anniversary of the Lehman Brothers collapse, It has been a decade since the markets had to be truly focused on the FUNDING markets  so many people are left with more questions than answers.

The Fed will undertake another repo operation on Wednesday while the FOMC is meeting. This has many people convinced that the net result will be a 25 basis point CUT as the central bank convinces the markets that they will provide liquidity in an effort to alleviate any potential year-end funding issues. It seems that the CONSENSUS is for a quarter-point cut but for me that is not the critical point. What is most important is HOW DOES THE VOTE GO. At the July FOMC meeting the vote was 8-2 with Esther George and Eric Rosengren dissenting because they didn’t believe the data supported the cut.

But, we should hear from Chairman Jerome Powell on what or how much global concerns are raising the risk/uncertainty levels at the FOMC. The ECB just renewed QE and cut its deposit rate deeper into negative territory. Also, there are some who theorize that the SPIKE in the overnight DOLLAR FUNDING may have a global component as there exists a SHORTAGE in some emerging markets. If the GLOBAL CONCERNS are growing even without the TARIFFS as the hot button issue, then it will mean that the work of Vice Chairman Richard Clarida has become the accepted forward view, resulting in Presidents George and Rosengren backing off the more hawkish acceptance of a parochial U.S. dominant view.

There are many opinions circulating, especially now that FED FUNDS FUTURES are allegedly pricing a 50% chance of a cut, while the overall market has it fully priced. But with the spike in the EFFECTIVE FED FUNDS rate, the September CONTRACT has a smoothed average resulting in a bias against a drop. My major key is the FOMC VOTE—a unanimous vote to CUT would be dovish in my opinion.Regardless,Chairman Powell will be under intense questioning at the press conference which will be followed by the fire-power of the Tweeter-in-Chief.

***There’s still nothing certain about the propagators of the Saudi oil production destruction. It is a positive that there has been no rush to a rash response but it does raise concerns about the efficacy of the U.S. intelligence establishment. All of that spending on the most advanced systems and still no certainty about where the attack originated. When I was studying nuclear proliferation in the 1970s,  the satellite confirmations could verify a golf ball from many miles above the earth. Where is the proof of confirmation?

One thing I will continue to stress: Those who speak don’t know, while those who know don’t speak. Translation: The proliferation of opinions that fill the airwaves is highly irresponsible. One thing remains certain: Vladimir Putin has had his stature elevated, for whatever happens, the influence of Russia to determine any outcome in the morass of the MIDEAST is critical. Putin has won through higher OIL prices but more significantly, all issues of war/peace who involve the Russians. What price will Putin exact for his cooperation. How about the removal of sanctions?

***Listen for Powell as he insists that the FED sees the inflationary impact of a rise in OIL PRICES as TRANSITORY, thus no reason to be concerned about cutting rates because of inflation fears. In a fragile global economy the FED will stress that a supply shock will have a detrimental effect on global growth (hence lower for longer). Be patient when listening to Powell’s interactions with the media.

Tags: Fed, Fed Funds Rate, FOMC, Jerome Powell, repo market, U.S. dollar funding

This entry was posted on September 17, 2019 at 7:38 pm and is filed under Debt Market, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.