October 17 is going to be a big day for global USD money markets. It’s the deadline by which prime money market reforms must adjust to floating NAV models, leaving only those funds investing in government securities able to offer par value protection. The likes of Zoltan Pozsar at Credit Suisse are expecting banks to lose a significant whack of unsecured bank funding as a result. Read more
Central bankers in Europe have been thinking a lot about The Death of Banks lately. Not so much in the US.
There’s good reason for that, of course. Europe has been bleeding out banks with negative rates, so policy makers there have become painfully aware of the banks’ role implementing monetary policy.
The US Federal Reserve, on the other hand, has been keeping banks alive with a steady drip of interest on excess reserves, or IOER, to control rates in a financial system awash with liquidity. The Fed’s releasing a policy statement today (we understand if you forgot about that in the heli-frenzy before the BoJ on Friday).
Of course, keeping banks on life support with IOER doesn’t help net interest margins. NIM is a key measure of bank profitability. It’s also closely tied to the US yield curve — which is unfortunate for banks, because that sucker has been positively steamrolled lately by the combination of low yields abroad, low inflation expectations and rising US policy rates. Read more
It’s 1998 again in emerging markets, and it’s good:
The best parallel with recent events – major shock (this time, the UK vote), DM central bank liquidity reassurance and market surge – is, in our view, the collapse of Long-Term Capital Management (LTCM) in September 1998. In addition to a bailout for LTCM, the Fed ‘turned on a dime’ then and cut rates by 75bp in two months; risk markets took off. While MSCI GEMs fell much more before Sept. 1998 (Asia and Russian crises) than recently, EM rose by 31% in two months after LTCM and by 120% by March 2000. As usual, the USD played a role; after a four-year 34% rally to August 1998, the $ TWI fell by 11% after LTCM. The extremes will be hard to repeat, but the earlier episode confirms how liquidity is a ‘great healer’…
Raghuram Rajan, the luddite at the RBI (for now at least) has been banging on a particular drum for a while.
He told the world — at an IMF conference in Delhi earlier this year — that a system of rules governing the effects of monetary policy (or behaviour, if you will) would be nice. It would be based primarily on spillovers and ranked according to a Green, Orange, Red system familiar to anyone who has ever had a work-review of anything, ever. Green equals good, for those who have understandably repressed previous encounters with this type of system.
In a subsequent paper Rajan put more meat on the bones of his idea and now here it is in handy table form laying out those suggested rules for the monetary game, courtesy of Prachi Mishra, also of the RBI and Rajan’s occasional co-author: Read more
This post will be made up of two pieces. The first will try to explain why JPY continues to defy Japan’s negative rate-led demand for currency weakness. The second will add words to this picture from HSBC which proclaims a break in the (so-called, he adds hastily) currency wars, predicated mostly on said JPY strength:
At last sighting JPY was hovering at about Y108. That’s not good if you are the BoJ’s Kuroda or the overarching Abe, particularly because FX strength can beget more FX strength. The question is why did the yen start this slide: Read more
Here’s the Fed’s recent hike in context, courtesy of BofAML’s Hartnett et al. You might need to squint…
When you’re done squinting, you might also dwell on the fact that long-term rates matter much more than short-term rates in the US and that we might be about to enter “conundrum” territory once again, Read more
So charted by Citi.
As they say, the coolness of global inflation is not just an energy price story:
Let’s start with this from RBS’s Alberto Gallo (click to enlarge):
At FT Alphaville we’ve flagged concerns about the perfect storm of declining petrodollar/sweatdollar recycling flows, a Fed tightening schedule, and a regulatory environment increasingly averse to cross-border repos and funding, with potential unintended (or perhaps intended but grossly under appreciated) effects for offshore dollar liquidity.
Why dollar liquidity, not euro, sterling or yen? Well, obviously, because the dollar remains the premier global reserve asset. Read more
Peter Stella is an experienced IMFer on a crusade to champion base money understanding in a world of hard money obsessives who refuse to listen to reason.
From his latest blog post this week:
Bank reserves are demand deposits held at the central bank. Individual banks can and do transfer deposits among themselves constantly during business hours through electronic large value transfer systems (LVTS). Among the universe of LVTS, the largest are FEDWIRE and CHIPS in the US, CHAPS in the UK, BOJNET in Japan and TARGET2 in the Eurozone. From an individual bank’s perspective, reserves are “ultimate” liquidity—available instantly in real time to satisfy payments obligations to other banks.
The Fed’s December transcript reveals some interesting foresight by Philadelphia Fed president Charles Plosser in discussions about how the Fed should communicate its regime shift (i.e. that it was moving away from targeting the Fed Funds rate towards using base money, balance sheet and other quantitative measures as its primary tools).
In the transcript, Plosser refers to the fact that near-zero rates and unconventional policy will eventually have to be overturned, and that this could be a tricky challenge for the Fed when the time comes. Nevertheless, he also notes that when it comes to the Fed’s balance sheet, the introduction of interest on excess reserves (a.k.a a floor system) means the Fed can in theory continue to control rates without shrinking its balance sheet at all for some time. Read more
Further insights into the Fed’s financial-crisis priorities by way of the December 2008 FOMC meeting transcript, released this Friday. This time we refer to their discussion about the possible unintended side-effects of zero-lower bound policy and in particular the spike in Treasury fails that was occurring at the time.
It’s worth reminding that at the time, only a few market commenters really understood the implications and severity of a spike in Treasury fails to deliver/receive. Read more
This is a guest post by Manmohan Singh, a senior economist at the IMF. Views expressed are his own and not those of the IMF.
Some central banks (Fed, Bank of England) have become large repositories of good collateral as a result of their QE policies. But excess reserves at central banks are not the same thing as good collateral that circulates through the non-bank/bank nexus. Read more
On Monday, the Office of the Comptroller of the Currency and the Federal Reserve issued “enforcement actions” against JPMorgan, which makes it sound a lot more exciting than it is.
The slaps on the wrist for the “London whale” trades, and failures concerning anti-money laundering procedures, come with no fines and no admission or denial of any wrongdoing. The Fed does, however, reserve the right to take further action and the UK’s Financial Services authority said it’s still looking into it. Read more
Central bankers in the US and Europe may think they’re engaging in policies accommodative to economic growth, but two can play in this game of acronyms! The team at Morgan Stanley fights letters with letters, in a note released on Friday (emphasis ours):
Global central banks have done all in their power to rescue the financial markets from the doldrums. Markets have clearly noticed their unwavering intent to “do whatever it takes” and the open-ended nature of the response. Notwithstanding this central bank resolve and despite QE, OMT, et al., we remain strategically cautious. Our stubbornness is quite simple – fundamentals. On the other side of QE and OMT are IP, PMI, and GDP, which continue to look worse, not better. As such, the key to our call is very simple: we think poor fundamentals will trump central bank action. Time will tell.
The wait is finally over (well, not entirely — the new Statement of Economic Projections will be out later and we’ll have much more during US Markets Live starting at 2:10pm), and the headline news is that Operation Twist has been extended through the end of the year.
We’ll also have rolling updates to this post, but for now: Read more
Yep, nearly time to start talking about the next FOMC meeting, a two-day affair that begins this Tuesday.
Any big decisions regarding further quantitative easing are more likely to be taken later, closer to when Operation Twist is scheduled to end in mid-June. (Expect to see more stories using the “wait-and-see mode” formulation.) But on the schedule is the second iteration of the individual participants’ federal funds rate projections, and that could be interesting. Read more
The man who did the Fed’s buying will – by coincidence – leave the NY Fed pretty much the minute Operation Twist finishes in June.
Full release below: Read more
The Fed isn’t the only central bank grappling with flaws in its communications policy amid problems with its traditional policy transmission mechanisms.
Everyone is well aware of the ECB’s non-traditional measures to this point: the three-year LTRO’s, the extraordinary expansion of its balance sheet and thereby the monetary base, the acceptance of a wider range of collateral for repo with the central bank, etc. Read more
FT Alphaville has outlined how securitisation is getting back to its roots lately, allowing banks to reduce capital holdings at a time when fresh capital is hard to come by.
Basically, they buy protection on slices of their own assets, paying out handsome coupons to hedge funds and other investors to take on the assets’ risk. Ergo, less capital needs to be held by the bank to back this risk. Read more
The airwaves are once again aflutter with tales of the “shadow banking” sector, owing to the chief of the relatively new Financial Stability Board.
As the FT’s Tracy Alloway also recently reported, the sector was already back to its pre-crisis size at the end of 2010 at a healthy $60,000bn of assets. Read more
The US Federal Reserve said the economy is doing a little better but noted significant downside risks from the eurozone crisis and kept monetary policy firmly on hold, the FT reports. Its statement on Tuesday, little changed since November’s, means that the rate-setting Federal Open Market Committee will hold fire on any further easing and await developments in the new year. The FOMC is caught between stronger economic data in the US and uncertainty about what will happen in Europe. Recent data on consumption and business confidence has raised hopes of stronger growth next year but much depends on whether Congress extends a 2 percentage point reduction in payroll taxes into 2012. The Fed is taking advantage of a quieter period to work on changes to its communication policy including the possible adoption of an explicit numerical objective for inflation.
The US Federal Reserve considered a new round of quantitative easing as an option at its September monetary policy meeting, suggesting that “QE3” is still possible if the economy weakens further, the FT reports. “A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” say minutes of the meeting, released on Wednesday. At the September meeting the Fed launched “Operation Twist” – a $400bn programme of selling short-dated and buying longer-dated Treasuries – in an effort to drive down long-term interest rates and support a failing economic recovery. But the minutes suggest there is still an appetite on the rate-setting Federal Open Market Committee for more measures to support growth. While three of the 10 FOMC members voted against Twist, the minutes reveal that two other members thought that the outlook supported stronger action, and voted for Twist only because “it did not rule out additional steps at future meetings”.
“Are foreign central banks rejecting Operation Twist?”
That’s the provocative question asked in a note by RBS strategists this morning — and while the answer is “no”, the rationale for it is both intriguing and touches on some interesting developments happening around the globe. Read more
The US Federal Reserve on Wednesday launched “Operation Twist”, announcing it would buy $400bn of long-dated Treasuries, financed by the sale of an equal amount of bonds with three years or less to run. However Asian stocks tracked Wall Street lower as investors took fright at the sentiment in the Fed’s statement, which referred “significant downside risks to the economic outlook”. The FT reports the Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage financiers such as Fannie Mae and with a strong focus on buying 30-year Treasuries. Such a big move suggests that Ben Bernanke, Fed chairman, is alarmed by the slowdown, and has decided to override opposition on the rate-setting Federal Open Market Committee and provide as much stimulus as easily practical. The purchases will run until June 2012. Market interest rates moved, but not enormously, suggesting that a large “twist” was already priced in. There are also continued doubts about how much households will respond to lower interest rates at a time when they are trying to pay down debts left behind by the financial crisis.
The US Federal Reserve launched “Operation Twist” on Wednesday in a bold attempt to drive down long-term interest rates and reinvigorate the faltering economy, reports the FT. The central bank said that it would buy $400bn of Treasuries with remaining maturities of six to 30 years and finance that by selling an equal amount of Treasuries with three years or less to run. “This programme should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” said the Fed. The policy is named after a similar attempt to “twist” the shape of the yield curve in the early 1960s. The Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage agencies such as Fannie Mae and with a strong focus on buying 30-year Treasuries. “We got a double twist,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
… some sort of easing, again.
He had already set it at Jackson Hole and the August 9 FOMC, and mostly confirmed by the minutes of that meeting. Read more
The chatter on Friday in response to the stomach-punching payrolls is that we’re headed for Operation Twist Part Deux — number 13 on our list of Fantasy Fed options — though not outright QE3 in the form of large scale asset purchases. At least not yet.
But that was already our guess after the last minutes were released. We had been expecting the debate to have already moved beyond the timing of the New Twist and toward its form. Read more