The eagerly awaited release of the FOMC minutes revealed little, but two potential nuggets were uncovered and we will watch to see if they turn into valuable assets. The first was the discussion of the FIXED-RATE, FULL-ALLOTMENT OVERNIGHT REVERSE REPURCHASE AGREEMENT (also known as the O/N RRP). This is a very sophisticated monetary tool that the Fed hopes to utilize to resolve the “FORWARD PROBLEM” of excess reserves in the banking system. The System Open Market Account (SOMA) has been testing the O/N RPP since September to ensure that SOMA can handle the use of the facility as an active tool of policy, possibly utilizing it as the workhorse of the issue of EXCESS RESERVES after the massive Fed QE programs. In quoting from the text: “The proposed increase in caps was intended to test the Desk’s ability to manage somewhat larger operational flows and to provide additional information about the potential usefulness of O/N RPP operations to affect market interest rates when doing so becomes appropriate.” This is an issue that will prove market moving on a regular basis as the operational flows grow in size. (I will cover this in-depth in another piece).
Posts Tagged ‘tapering’
Notes From Underground: It Ain’t Rocket Science, Which Is Too Bad for the Dismal Science
January 5, 2014There is an American expression: It Ain’t Rocket Science,which is meant to be a pejorative phrase to denote that if you fail to comprehend a somewhat easy concept you must have diminished cerebral capacity. I do not mean to imply this but rather use it to address some FED SPEAK over the weekend in which the American Economic Association provided lively discussion about the “SUCCESS” of the Fed’s policies for the last five years. There was point and counterpoint from highly acclaimed economists and thus ECONOMICS PROVED AGAIN THAT IT IS NOT A HARD SCIENCE. When Aerospace engineers build a spacecraft and design its mission they are sure of the spacecrafts return barring some unpredictable mechanical failure. AEROSPACE ENGINEERING IS PROVEN TO BE AN EXACT SCIENCE.
Notes From Underground: TOTO Is Out of Kansas and Back In Washington
December 16, 2013Will TOTO bite the wizard behind the curtain? Toto, in this case, is not Dorothy’s dog but rather the market’s obsession with taper on/taper off, or TOTO. Today’s trading proved to be a “ball of confusion” as the market emerged from a relatively quiet weekend to open in a taper off mode as the bonds and equities were bid. The currency markets were relatively quiet as were the precious metals. Mid-morning, though, the long end of the Treasury curve began to sell off and the yield curve went from a flattening bias to steepening, which seemed to represent the market adopting a taper on bias. However, the currency and precious metals markets reacted contra to previous correlations and rallied as the yields on the long-end of the curve rose. (Again, very confusing in regards to recent patterns.) The BONDS closed toward the lows but the metals and equities held their rallies, which leads me to believe that the market has adapted to the idea of a Fed tapering being tied to a change in the language of forward guidance.
Notes From Underground: ECB’s Mario Draghi Cuts Rates and Sends Global Markets A “Twitter”
November 10, 2013Catching up: As the world knows, the ECB cut the overnight rate 25 basis points to 0.25%. The cut was more symbolic than substantial for the “recent” threat of a deflationary spiral will require more action than a mere drop in rates. The front month EURIBOR contract gained just two and a half points showing the cut in rates was certainly anticipated–DECEMBER EURIBOR rose to 0.99790 from 0.99765. The more important part was the symbolic nature of Draghi defying Bundesbank chieftain Jens Weidmann. Now that the German elections are over Mario Draghi wants to let the world know that he is in charge of the ECB board and will not be intimidated by the giant shadow cast by the Bundesbank, which is also headquartered in Frankfurt.
Notes From Underground: Investing in the Time of Hilsenrath
October 30, 2013In the biggest news story of the day, Jon Hilsenrath reported that New Zealand bank Governor Wheeler led his board to hold the line on interest rates. (NOTE: Hilsenrath didn’t report the New Zealand news as he was too busy trying to impact U.S. markets with a tweet here and a tweet there.) The RBNZ did note that the global economic recovery remains “patchy.” The KIWI bank seems content to allow rates to remain on hold for two major reasons: 1. The macroprudential regulations instituted to slow house price inflation need more time to work–New Zealand instituted regulations on loan-to-value mortgages; and 2. “The exchange rate remains high and is a headwind to the traded goods sector. Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing and magnitude of future increases in the OCR. Fiscal consolidation is also expected to continue weighing on demand over the next few years.”
Notes From Underground: Is Mario Draghi the Paradigm of Moral Hazard?
October 28, 2013First, to Lou Reed: The market is the ultimate WALK ON THE WILD SIDE as first it dresses as a bull and changes into bear garb … the ultimate transvestite. Be at peace Lou and thanks for the years of rocking out.
As the news cycle has slowed because of the lack of immediate crisis in Washington, focus is starting to shift toward Europe and the ECB’s effort to craft a credible, EU-wide stress test. The market mocked the previous effort for being a very weak attempt at measuring real elements of credit stress within European banks. Now that the ECB has been tasked with being the conduit and trustee as a single EU bank supervisor President Draghi is going to have to be credible in the eyes of the ECB paymasters. In an interview with Bloomberg’s Francine Lacqua last week, Mario Draghi said: “The test is credible because the ultimate purpose of it is to restore or strengthen the private sector confidence in the soundness of the banks,in the quality of their balance sheets. Ultimately that’s the objective ,to have private-sector money to be put into the banking industry.”
Notes From Underground: Forward Guidance Takes a Step Backward
October 22, 2013Today the markets received the long-awaited data on the U.S. job situation and the major beneficiary seemed to be the HFT algorithms that had the number two seconds early. The stock indices, currencies and precious metals all reversed early movements and rallied just prior to the public release. Setting aside the trading action, the data continues to reflect a very tepid recovery. Nonfarm payrolls grew by 148,000 making the FED’s September 18 decision look credible. More important, the average hourly earnings grew less than expected and kept the pace of wage growth very anemic. The FED has communicated that it is the jobs rate that the markets should be mindful of when anticipating any future action to raise rates. The FED has told the markets that an UNEMPLOYMENT LEVEL of 7.0% or maybe 6.5% will be a threshold target that could prompt the FED into action.
Notes From Underground: One More Issue Resolved … Chancellor Merkel Prevails
September 23, 2013The German election results were pretty much as polls predicted, although the CDU/CSU party of Angela Merkel ran stronger than polls suggested and the FDP, Merkel’s present coalition partner ran similar to last week’s Bavarian State votes, and is forced out of government as it failed to reach the necessary 5% threshold. The FDP failed to receive as many votes as the UPSTART Alternative for Germany (AfD), which just missed the 5% criterion and thus will have no votes in the Parliament. Chancellor Merkel has not yet formed a governing coalition as she still needs five votes to secure a parliamentary majority. The EURO performed in a very stable fashion as the news reflected the status quo. The market is still busy digesting the news from the FED‘s non-tapering announcement, which has put more turmoil than stability into the financial markets. The U.S. equity markets, using the S&Ps as my measure, closed below the low made on September 17 before the FOMC surprise statement. (NOTE: I am using a continuation chart for this picture). The FED‘s “Wednesday Surprise” has left the market wondering what the FED sees that kept it from beginning a tapering of its LARGE SCALE ASSET PURCHASES, or QE by another name. It may well be that the FED doesn’t see any problems but just being cautious in response to recent weaker data.
Notes From Underground: September, the Potential for An Investment Wasteland
September 4, 2013Yesterday, I had a global macro session with some of the best users of the Notes From Underground. They are disciplined in pursuit of profit but as most of my readers try to do, pursue causation as a prelude to correlation. Carl had prepared a white board chart of all of the relevant events that are set to play out in September. April may be the cruelest month but September 2013 will certainly give T.S. Eliot’s poem a run for the grand title. The desire to anticipate any of the events may lead to a “wasteland” of capital. So thanks to Carl, let me restate the list of events:
Notes From Underground: Why Fed Will Likely Taper in September (CNBC)
September 2, 2013
Click on image to watch to why Rick and I believe the Fed will announce QE tapering at the September FOMC meeting.