Market participants, assuming they can somehow tune out what promises to be incessant political noise, will focus on a bevy of key data due this week in the US, including ISM manufacturing and September payrolls.
There’s reason to fret, even as it’s equally plausible to suggest that the US economy is likely to retain its teflon coating for a least another couple of months thanks to a still resilient consumer and a solid services sector (top pane in the visual).
Of course, ISM manufacturing fell into contraction territory in August (red in the bottom pane), and in light of a better-than-expected print on IHS Markit’s factory gauge last week, market participants will be looking for a bounce. “We expect some stabilization in the manufacturing ISM (Tuesday) and forecast a mild rebound to 49.9 after trade tensions eased in September”, Barclays said over the weekend. Some desks are looking for a jump back above the 50 line that separates expansion from contraction.
As for payrolls, note in the bottom pane that the trend is not your friend. That’s the 6-month moving average in yellow.
Below is the 3-month average (again in yellow) along with the monthly numbers and the unemployment rate. You’ll recall that the August print (130k on the headline) was a disappointment and revisions lopped 15k from June’s headline and 5k from July’s.
Although last week’s IHS Markit manufacturing PMI was an upside surprise, the non-manufacturing gauge missed, and the employment index both for services and for the composite index printed in contraction territory.
At 49.4, the Markit composite employment index suggests the labor market may have decelerated below the breakeven growth rate of 100k per month.
That’s the setup this week on the data front, and the numbers will be set against an exceptionally fraught domestic political backdrop, which has implications for assets. “Political pressure might increase the assertiveness of the President, which increases the risks of increased use of tariffs and unconventional tools to attain other policy goals (on currency, immigration etc.), and could bring a broadening and escalation of the trade wars”, Barclays warned on Sunday. “However, if equities volatility/downside were to increase, Trump might instead opt to keep his conciliatory tone toward China, in a bid to support markets”.
The list of Fed speakers is comically long. The market will hear from Evans, Clarida, Bowman (Tuesday), Barkin, Harker, Williams (Wednesday), Quarles, Mester, Kaplan, Clarida (Thursday) and Rosengren, Bostic (Friday).
As if that wouldn’t be enough Fedspeak, Powell will deliver the opening remarks at a “Fed Listens†event in Washington. Brainard will apparently be there for that, as will Quarles.
Everyone will be listening for any hint as to what the Fed plans to do to permanently address the funding squeeze that showed up in September. As detailed here on Sunday morning in “The Funding Storm Has Passed. Now What?“, the resumption of POMOs in November is all but certain. It’s just a question of the details and there’s still room for more discussion on a standing repo facility.
What can we say other than “Feel the market! Don’t just go by meaningless numbers. Good luck!”
I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!
— Donald J. Trump (@realDonaldTrump) December 18, 2018
The futures look embolden to preserve the king’s authority as of Sunday night.
The problem with going down lots of rabbit holes is to fall-into the problem of becoming lost. The Fed Repo holes are vast and interconnected and connecting the right dots and finding a path is challenging. However, some clues get better and some holes end up being interesting. I started off going down the collateral hole, wondering what cash actually was, in terms of collateral, but ended up sort of accidentally looking at mortgage backed securities. That wild goose chase took a long time, as I learned about FreddieMac and Mirror Certificates which relate to Uniform Mortgage-Backed Securities. That hole, smells like a very large sewer:
“Freddie Mac-issued UMBS can be commingled in resecuritizations with corresponding
comparable Freddie Mac-issued UMBS Mirror Certificates, Supers and Supers Mirror Certificates as
well as Fannie Mae-issued UMBS and Supers and certain legacy TBA-eligible mortgage-backed
securities issued by Fannie Mae. Freddie Mac-issued MBS cannot be commingled with Fannie Mae
securities.”
It’s stuff like that, which makes me wonder what collateral is and what is cash-like; Basil lll describes assets — but its The Fed who implements regs as they see fit with exemptions and exceptions to rules. So, what if The Standing Repo Facility ends up being fueled by crap like Freddie Mirrors — and how do banks fit in this picture, if they don’t wanna trade risky Fed stuff? What if liquidity gets screwed up by too many banks and The Fed end-up having Too Much Crap? Maybe this is where this is headed, i.e., a new facility for crap trading?
Last week I was inclined to think hoarding was going on, but I’m not convinced of that, but there are lots of overlapping tangled up constraints where each party in these trades has unique circumstances that probably do cause arbitrage mismatches …
So, onto the final hole below, which is very worthwhile reading in-full, because it sort of does bring together some IOER stuff, then shines some light on MBS and then opens up the case for a facility that might support Agency Uniform Mortgage-Backed Securities. As will be noted by ** I thought it was entertaining last week that the recently retired Simon Potter from the Fed Trading Desk, was a guest of honor at Bank of America, acting as cheerleader for the SRF and calling for the Fed to bloat its already bloated balance sheet into a bigger punch bowl.
But wait a second, it is interesting that Freddie/Fannie still need Treasury and Fed as conduits: “We receive substantial support from Treasury and are dependent upon its continued support in
order to continue operating our business. Our ability to access funds from Treasury under the Purchase
Agreement is critical to keeping us solvent and avoiding appointment of a receiver by FHFA under
statutory mandatory receivership provisions.”
Speech
The Federal Reserve’s Experience Purchasing and Reinvesting Agency MBS
March 07, 2019
Simon Potter**, Executive Vice President
Remarks at the Bank of England, London
https://www.newyorkfed.org/newsevents/speeches/2019/pot190307
** Recently acting as lobbying shill @ Bank of America (last week)
Potter Warns Fed May Have to Buy More Debt to Calm Market
Between the middle of 2008 and late 2014 the Federal Reserve expanded the size of its balance sheet from around $900 billion to about $4.5 trillion.
These programs altered the composition of the System Open Market Account’s (SOMA) domestic securities portfolio from one consisting entirely of U.S. Treasury securities to one including approximately 40 percent agency MBS (Figure 1).2 Overall, the Federal Reserve purchased over $4 trillion in agency MBS
With over $6.3 trillion outstanding and an estimated average daily trading volume of over $200 billion in 2018, agency MBS meet these criteria.7
However, adding a new asset class can also bring new challenges, requiring a central bank to learn more about an asset class and to build or refine the internal systems needed to operate in that market.11 Furthermore, the clearing, settlement and custody of agency MBS require unique attention.12 Finally, there may be political economy perspectives to consider when buying assets other than sovereign government debt, such as benefiting specific economic sectors or private entities.
Lesson #4: Reinvestments Matter
Relatively quickly, the Fed came to learn that the reinvestment of principal payments received from securities held in its portfolio represented a distinct balance sheet tool that could help to maintain the FOMC’s desired level of monetary policy accommodation.26 This is because, in addition to the acquisition of securities through asset purchases, the period over which the central bank intends to hold its securities helps to shape market participants’ expectations about the size and duration of assets available to the public. Extending the holding period through reinvestments prolongs this so-called stock effect on the various transmission channels.
Though these paydowns occurred over time, they amounted to a considerable reduction in the Fed’s agency MBS portfolio, with the $1.25 trillion purchased through the end of LSAP 1 in mid-2010 falling to about $800 billion by late 2011, when reinvestment of agency MBS principal paydowns into agency MBS were initiated. Once they began, cumulative agency MBS reinvestments summed to about $2 trillion through 2018–essentially 100 percent turnover of just over $2 trillion in agency MBS purchases through LSAPs.
===> In the near term, Figure 8 shows that current market pricing implies that no further agency MBS reinvestment operations will be necessary during the normalization process. But since principal payments on agency MBS are sensitive to changes in long-term interest rates and other factors, it is possible they could rise above the cap and require some agency MBS reinvestment purchases in the future.31 In light of this possibility and in the interest of operational readiness, the Desk has been purchasing up to $300 million of agency MBS for monthly periods in which principal payments fall below the cap and there are otherwise no reinvestments.32
In addition, the structure of the agency MBS market is expected to change with the June 2019 implementation of the Federal Housing Finance Agency’s Single Security Initiative. Under this initiative, Fannie Mae and Freddie Mac MBS are expected to be harmonized such that they can be traded in a single TBA contract, known as Uniform MBS (or UMBS). This change is expected to improve the liquidity of the agency MBS market and would simplify any future agency MBS purchase operations for the Desk. The Desk is developing its operational readiness for transacting in UMBS and will likely conduct operational readiness operations in UMBS later this year.36
===> From early 2009 through October 2014, the Federal Reserve added on net approximately $1.8 trillion of longer-term agency MBS and agency debt securities to the SOMA portfolio through its large-scale asset purchase programs. Agency MBS purchases were concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, as these securities have greater liquidity and are closely tied to primary mortgage rates. The aim of these purchases was to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
Artificially inflated housing valuations are the biggest Ponzi scheme of all. When people figure that out, look out below.