So where does this leave us? Well, it’s highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB’s promise of “unlimited” bond purchases based on certain “conditions” being met (an empty promise if ever there was one).
The headlines proclaimed - confidence is back and the money-market funds are buying European debt again. This makes perfect sense, Europe is fixed and they are backing up the Corzine truck!! Well, no! According to the report from JPMorgan, Prime MMF assets rose $16bn but the bulk was in secured exposure to German and French banks - not exactly the kind of risk-on short-end exuberance that investors are supposed to infer from the headlines. Just as we have seen everywhere, collateral is king and secured credit is the preferred way - even if it comes at a premium. It seems that while the tail-risk is supposedly gone, even short-duration funds are not comfortable with the conditionality. Isn't it odd how headlines (from Reuters: U.S. money funds add euro zone debt in August) can be so different from reality?
Perhaps never a more truthful 'lifting-the-veil' paragraph has been written by the squid as the following discussion of just what NEW QE will consist of and what it will achieve; sad that our economy market has come to this.
"The form of any return to QE is less clear. The issue is not so much whether the Fed buys Treasuries or agency mortgage-backed securities; we are pretty sure that any new program would be primarily focused on agency MBS purchases. These should have a somewhat bigger per-dollar effect on private-sector demand and are probably less controversial with the public than Treasury purchases. They can be framed as help for homebuyers to achieve the American Dream, which sounds better than help for the government to run large budget deficits."
FOMC Minutes Indicate No Shift In Fed's Views, Even As Many Members See More Easing Likely WarrantedSubmitted by Tyler Durden on 08/22/2012 14:02 -0400
The thoughts of the FOMC from a mere three weeks ago - before a 30bps rise in 10Y yields (40bps in 30Y), 5% rise in the NASDAQ, 8.5% rise in AAPL, and 85bps compression in Spanish bond spreads - are out. It appears little has changed in their muddle-through, always at-the-ready, wish-it-were-better view of the world. Via Bloomberg,
- *FOMC PARTICIPANTS SAW ECONOMY DECELERATING AFTER JUNE MEETING
- *MANY FOMC PARTICIPANTS SAID MANUFACTURING WAS SLOW OR FALLING
- *FOMC PARTICIPANTS DISCUSSED QE, EXTENDING 2014 FORECAST ON RATE
- *FED STAFF SAID MARKETS HAVE LARGE CAPACITY TO HANDLE MORE QE
- *MANY FOMC PARTICIPANTS SAW NEW QE AS BOLSTERING U.S. RECOVERY
- *MANY ON FOMC FAVORED EASING SOON IF NO SUSTAINED GROWTH PICKUP
Translation: "Many on FOMC want the S&P at all time highs without actually doing any QE, ever, because that will mean the Fed is officially out of bullets"
As always, Goldman Corzined anyone who listened to its call that an epic QE is coming. Fed did the worst possible outcome for risk- merely extended Twist, just as the credit market predicted it would 3 weeks ago:
- FED SAYS IT IS PREPARED TO TAKE FURTHER ACTION `AS APPROPRIATE
- FED TWIST EXTENSION TO SWAP $267 BLN OF TREASURIES BY END 2012
- FED TO SELL OR REDEEM `EQUAL AMOUNT' DEBT DUE 3 YEARS OR LESS
- FED TO BUY TREASURIES DUE IN 6 TO 30 YEARS AT `CURRENT PACE'
- FED SAYS EMPLOYMENT GROWTH `HAS SLOWED'
- FED SAYS INFLATION HAS DECLINED, REFLECTING OIL
- FED REITERATES ECONOMY `EXPANDING MODERATELY'
- LACKER DISSENTS FROM FOMC DECISION
This means that soon Primary Dealers' entire balance sheets will be filled with the entire inventory of Fed 1-3 year bonds. Market not happy. Full June statement here.
At the rate the market has soared in the past 3 days, one would think Bernanke has already formally announced QE. Instead we have had a rumor, a hint, and a headline. All of this was sufficient to push the DJIA up 500 points. Problem is there has been nothing official from the Fed. Which is why everyone will be looking for the Chairman to leak something at the 10am hearing before the Joint Economic Committee. Otherwise, if nothing comes now, and nothing comes on June 20, we may be looking at another deja vu event from 2011: namely the August 2011 market crash.
As we look forward to tomorrow's scorched-earth policy-fest from Draghi-et-al., Jefferies' David Zervos, in his typically understated manner, notes "I love the smell of napalm in the morning. We are back in the kill zone - Apocalypse Europe." There will be no more strategizing, no more war games, no more speeches imploring the politicians to act. This is the real deal - a full scale European led global financial crisis that requires immediate and aggressive response from the only entities with the authority to act in the world financial "theatre". We should all keep in mind that the Europeans have not been able to generate an effective response to their debt/deflation crisis as of yet, and of course it is having global consequences. This is why we are here again looking into the deflationary abyss. The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons.
Every quarter as part of its refunding announcement, the Office of Debt Management together with the all important Treasury Borrowing Advisory Committee, which as noted previously is basically Wall Street's conduit telling the Treasury what to do, releases its Fiscal Quarterly Report which is for all intents and purposes the most important presentation of any 3 month period, containing not only 70 slides worth of critical charts about the fiscal status of the country, America's debt issuance, its funding needs, the structure of the Treasury portfolio, but more importantly what future debt supply and demand needs look like, as well as various sundry topics which will shape the debate between Wall Street and Treasury execs for the next 3 months: some of the fascinating topics touched upon are fixed income ETFs, algo trading in Treasurys, and finally the implications of High Frequency trading - a topic which has finally made it to the highest levels of executive discussion. It is presented in its entirety below (in a non-click bait fashion as we respect readers' intelligence), although we find the following statement absolutely priceless: "Anticipation of central bank behavior has become a significant driver of market sentiment." This is coming from the banks and Treasury. Q.E.D.
Today's second most important event is the testimony of Bernanke before the House Financial Services Committee (yes, Maxine Waters will be there). Lawmakers will question him about the Fed's plans on avoiding inflation and the current unemployment rate. Committee members are also expected to inquiry about fiscal policy, the status of the nation's economic recovery, the impact of rising gas prices, and the debt crisis in Europe. Most importantly, Benny will be asked to testify on when more QEasing is coming as the markets need their fix. Watch it live at C-Span after the jump.
Isn’t it meaningless to look at the inverse floaters in isolation? To assess risk, shouldn’t we look at the entire portfolio held by Freddie Mac?
Not only is the large bank-GSE cartel preventing millions of Americans from refinancing, but these same cartel players are also thwarting Fed monetary policy and hurting all our economic prospects.
As US markets remain in hibernation for a few more hours, Goldman picks out the five critical questions that need to be considered in the context of 2012's economic outlook. Jan Hatzius and his team ask and answer a veritable chart-fest of crucial items from whether US growth will pick up to above-trend (and remain 'decoupled' from Europe's downside drag), whether inflation will find its Goldilocks moment this year and if the US housing market will bottom in 2012 (this one is a stretch). Summarizing all of these in a final question, whether the Fed will ease further, the erudite economist continues to expect an expansion of LSAP (focused on Agency MBS) and an official re-adjustment to an inflation targeting environment. Their view remains that a nominal GDP target combined with more (larger) QE improves the chances of the Fed meeting its dual mandates (unemployment target?) over time but expectations for this radical shift remain predicated on considerably worse economic performance in the economy first (as they expect growth to disappoint). We feel the same way (worse is needed) and recall our recent (firstly here, then here and here) focus on the shift in the balance of power between the Fed and ECB balance sheets (forced Fed QE retaliation soon?).
Atlanta Fed On Federal Reserve Monetization Activities; $1.1 Trillion In USTs And Agency MBS Purchased To DateSubmitted by Tyler Durden on 09/19/2009 13:31 -0400
The Fed now has $15 billion in purchasing power left under the Treasury component of QE. Of the $1,250 billion in MBS projected to be bought by the end of the year, the Fed was already purchased $840 billion, leaving $410 billion in budgeted purchases over the next three and a half months: about $125 billion per month.
The Inspector General of the US Treasury has some negative things to say about the GSE MBS. Who looks silly? Who looks smart?