Tokyo CPI down again supports BOJ dovish stance for now
Source: Bloomberg
Fed member Bostic just said that he sees just 2 interest rate cuts in 2024 for a total of 50 basis points
As highlighted by the Kobeissi Letter -> This ONE THIRD the amount of rate cuts that futures are currently pricing-in. Bostic also said that he is "not comfortable declaring victory" against inflation at this point. Meanwhile, markets see a base case of 150 basis points in rate cuts in 2024. There is even a ~24% chance of 175 basis points in rate cuts. The Fed to market disconnect is widening. Source: The Kobeissi Letter
Bank of America Corp. expects the Federal Reserve to announce plans to begin tapering the runoff of its Treasuries holdings in March, coinciding with its first 25 basis points interest-rate cut.
- The Reverse Repo ("RRP") is de facto QE-infinity $ printed during 2020-21 that was sitting dormant. It's now being used to buy up US Treasuries. Problem: it is declining at a very rapid pace and might be gone by the end of January 2024. - Something needs to be done to preserve QB / liquidity. - This is why the Fed is now thinking about slowing down the pace of QT. Over the week-end, Dallas Fed chief Logan said the Fed should slow Asset runoff as Reverse Repo dwindles - 2024 is an election year and we expect net liquidity to be supportive for the economy, bond markets and risk assets
The "multipolar world" will remain a major topic in 2024 as the rewiring of the global commerce system creates geopolitical risks & business model shifts that will last decades
The Dollar’s & Euro's share in global CenBank reserves dropped. Greenback accounted for 59.2% of globally allocated FX reserves in Q3 2023, down from a revised 59.4% in Q2, lowest since Q4 2022. Euro’s share in reserves also fell to 19.6% from 19.7%, while the participation of Japan's Yen rose to 5.5% from 5.3%. Source: HolgerZ, Bloomberg
While many economists and financial analysts look at the 1970s as a potential playbook for the current decade, the 1940s could be an interesting reference to consider as well
The 40s was a decade of war and high budget deficit and rising debt level in the US. Monetary policy was mainly about financial repression, i.e keeping rates low despite temporarily high inflation. Overall, it was positive for risk assets. Source: Win Smart, FRED
China’s central bank assets have surged by nearly $600B in the last 4 months
In yuan terms, this was the largest 4-month increase in the history of the data. The issue of a bloated government deficit and significant debt is not exclusive to the US; it resonates globally. Source: Tavi Costa, Bloomberg
FED meeting minutes key takeaways:
1) rates likely at or near their peak 2) 2pct inflation target is maintained 3) monetary policy is likely to stay restrictive for some time 4) clear progress has been made on inflation (dixit the Fed) 5) see rate cuts by the end of 2024 FOMC views continue to diverge from market expectations (2x more rate cuts are currently priced vs. Fed guidance) Source: CNBC, The Kobeissi Letter
LIQUIDITY MATTERS... From QE (Quantitative Easing) to QT (Quantitative Tightening) to QB (Quantitative Balancing) to QE Light
Some interesting views by Andreas Steno Larsen (Steno Research / Macrobond): 2024 Q1 -> While we are celebrating our inflation-progress, Powell and Yellen intend on handing out "Stealth QE / QE light" gifts to the banking system in Q1-2024. Steno Research view is that USD liquidity is likely going to increase massively in Q1 due to a series of technicalities surrounding the BTFP, ON RRP and TGA facilities. These three liquidity adding mechanisms will more than outweigh the QT program (running at a little less than $95bn a month on average), leaving a very benign liquidity picture ahead for Q1-2024. By their estimates, liquidity will increase with $8-900bn until end-March, which almost resembles a QE-light / stealth QE scenario. This will in case be one of the fastest liquidity additions on record, only outpaced during the early innings of the pandemic! If this happens, such a liquidity injection might be a massive tailwind for risk assets...
