Tag Archives: #BTFP

Possibly Soaring

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So far this week, things have been boring
With data or news not outpouring
But starting today
More stuff’s on the way
With GDP possibly soaring

As well, we’ll hear from M Lagarde
Who’s promised her backbone is hard
It’s too soon to cut
As there’s still a glut
Of funds spread all over the yard

Heading into this morning’s data releases, we have had remarkably little on which to focus this week.  Flash PMI data yesterday was modestly better than expected, although manufacturing is still trending in recession around Europe and Asia.  Perhaps the biggest surprise was in the US where the manufacturing print was a solid 50.3, the first time it has been above the boom/bust line since last April.  However, that was not enough to quicken any pulses.

You can tell how dull things have been by the fact that the biggest news yesterday came from the Fed regarding the BTFP.  The BTFP (Bank Term Funding Program), you may recall, is the facility the Fed invented last March in the wake of the collapse of Silicon Valley and Signature banks.  The idea was they would lend money to the banks without the banks taking a haircut on the value of the collateral, so lending 100% of the collateral’s face value despite the fact the bonds were trading at 75 cents on the dollar.  It was designed to tide over weak banks and ostensibly had less stigma than borrowing from the Fed’s Discount Window, which is supposed to tide over weak banks.  But the funding was cheaper given the collateral price adjustment and over time, it garnered about $110 billion in utilization.  However, last November, when the market decided that the Fed was going to cut rates aggressively in 2024, the funding formula for these loans fell substantially below the IOER that the Fed pays to banks, reaching a spread of 60bps.  So, banks started using the BTFP to earn risk free cash.  Well, the Fed got tired of that game and as of today, raised the cost of funding thus eliminating the arbitrage.  And that was the most interesting thing in the markets yesterday!

But that was then.  Now we get to look ahead to a few key pieces of information starting with US Q4 GDP’s first reading (exp 2.0%) as well as Durable Goods (1.1%, 0.2% ex transport) and Initial (200K) and Continuing (1828K) Claims data.  That will be followed by the ECB’s press conference at 8:45 where Madame Lagarde will be able to reiterate her strong views that despite a very weak Eurozone economy, they have not yet solved the inflation problem and they are not going to cut rates anytime soon.  I have ignored the ECB official decision time as there is a vanishingly small probability that they will adjust rates from the current 4.0% level.

The question for market participants is whether any of this will matter, or if we still need to see the next crucial information, tomorrow’s PCE data and, of course, the FOMC meeting and press conference next Wednesday.  My sense is that much will revolve around that GDP print.  The Atlanta Fed’s GDPNow is forecasting a 2.4% print for Q4, still above the economists’ consensus, albeit not as far above as in Q3.  Given the market’s ongoing strong belief that the Fed is going to be aggressively cutting rates this year, an outcome at the GDPNow level or higher would certainly have a market impact, likely seeing a sell-off in bonds and a reduction in the probability of rate cuts going forward.  The natural extension of this would be a stronger dollar, weaker stocks and probably stronger oil prices as the demand side of the equation would be rising.

But in this topsy-turvy world where good news is bad, the converse is also likely true, a soft print will reinforce the ideas that the Fed is going to cut sooner and more aggressively which will have a short-term positive impact on stocks and bonds, although the dollar will suffer accordingly.

One of the market conversations about the Fed has been regarding the political implications of their moves and whether they may cut sooner just to try to avoid any appearance of a political bias.  But as I think about that, while the very small minority of people in this country who focus on the economy and markets will certainly have opinions on the subject, I would contend that for the vast majority of folks, whether the Fed cuts 25bps in March or May or June is just not going to change their lives nor change their vote.  Remember, monetary policy works with “long and variable” lags, so even if they do cut in March, it probably won’t start to feed through into any economic impact before the election.  The only conceivable impact would be that money-market fund yields would fall that 25bps, an annoyance but not a significant change.  My point is far too much emphasis is put on the potential political nature of this and I think it is overblown.

Turning to the overnight market activity, Chinese shares continue to benefit from the recent monetary and fiscal support that the government is adding with shares in HK and the mainland both higher by 2% overngith.  Meanwhile, Japanese shares were essentially unchanged, although that spread continues to narrow.  As to European bourses, they are softer this morning with the DAX (-0.5%) falling after weaker than forecast IFO data across the board indicating not only weak current conditions but weak prospects as well.  (As an aside, this is why it is so difficult to believe that Lagarde will hold off on rate cuts until the summer.  A weak Germany is a problem for the Eurozone.)   finally, after a mixed session yesterday, US futures are edging a bit higher as I type (7:45).

In the bond market, Treasury yields, which rose a few bps on the session yesterday, are essentially unchanged this morning but European sovereign yields are higher by 2bps across the board, perhaps in anticipation of something from the ECB.  JGB yields continue to creep higher as well, up another 2bps overnight as there is a growing confidence that the BOJ is going to exit their negative interest rate policy by April.  Right now I would still fade that bet.

Oil prices (+0.9%) have continued to rally with WRTI back above $75/bbl and Brent above $80/bbl.  Yesterday’s EIA inventory data showed surprisingly large drawdowns in crude and most distillates although gasoline inventories rose a bunch.  As well, it appears that the costs of transport are starting to drive the overall price higher with more and more shipping traffic avoiding the Red Sea.  Meanwhile, metals markets, after an ok day yesterday, are essentially unchanged this morning.

Finally, the dollar, which fell sharply yesterday, is mixed but broadly unchanged across the board.  Looking at my screen the largest move I see is KRW (-0.4%) with every G10 currency within 0.25 of yesterday’s closes.  At this point, the market is biding its time for today’s data as well as tomorrow’s PCE and next week’s FOMC meeting.  Unless that GDP number is a big miss in either direction, which I outlined above, I suspect a very quiet session here.

Right now, we are in a wait and see mode, so, let’s wait and see what the data brings and we can evaluate after the releases.

Good luck
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Markets Are Waiting

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The macro event of the day
Is actually micro I’d say
The markets are waiting
For all the debating
‘Bout Bitcoin to end in OK
 
The irony here is too great
As TradFi, the Bitcoin bros, hate
But they’re still a buyer
If number goes higher
‘Cause really, it’s all ‘bout the rate

It is a very slow day in the markets as evidenced by the fact that the biggest story is whether or not the SEC is going to approve a cash Bitcoin ETF.  Today is the deadline for the first application to be approved, or not, and the working belief is that if they are going to approve one, they will approve all 13 that have applied in order to prevent any concerns over favoritism to a particular manager.  Yesterday afternoon, there was a tweet from the SEC that indicated approvals had been made, but then within 10 minutes, the SEC denied that was the case and explained their X (Twitter) account had been hacked.

One of the interesting things of late in this space is that there has been a 20% rally in Bitcoin since the beginning of December, seemingly in anticipation of this event.  This price action has many believing we are looking at a ‘buy the rumor, sell the news’ type story with expectations that a short-term sell-off is coming after the announcement.  However, last night, after the erroneous Tweet, Bitcoin rallied more than 2% before turning back around on the retraction.

With that in mind, the more ironic issue, at least to me, is that there is so much excitement in the Bitcoin community for a traditional finance product like an ETF.  Institutionalizing Bitcoin and creating all the same structure and regulation as any other trading vehicle seems at odds with the entire concept of a new digital transaction medium that does not require a centralized system and is free to one and all.  Arguably, what it highlights is that the entire appeal of Bitcoin is that it is a highly speculative and volatile trading vehicle and is appreciated solely because its number can go up really fast!

In the end, just as the odds of a BRICS currency coming along and usurping the dollar’s throne as top currency in the world (at least when it comes to utilization) are close to zero, the same holds true here.  Bitcoin is never going to replace any fiat currency in the role of money.  Just as with every other asset, its value is entirely dependent on what someone will pay for it.  While an ETF will widen the population that is involved in the space, and perhaps ensure that the government never makes any effort to cut it off from the banking world, it will not change the world in any way, shape or form.

Away from this, the market is turning its focus toward tomorrow’s CPI report in the US as the next critical piece of information for the macro story.  Recent data elsewhere in the world has continued to show a cooling rate of inflation, with Australia’s overnight print at 4.3% a tick lower than expected while Norway’s 5.5% Core rate was also a tick lower than expected.  This follows yesterday’s Tokyo CPI which came in soft and is continuing the theme that the Fed, and central banks around the world, have successfully put the inflation genie back into the bottle.  Personally, I think it is premature to make that claim as I have seen very limited evidence that prices for rent are falling and based on the wage data we saw last week in the NFP report, wage rises, at 4.1%, remain well above the rate necessary to see a stable 2% inflation outcome.  But that is the narrative and it is being pushed hard by Yellen and the mainstream media.

As to today, yesterday’s directionless session in the US led to a mixed performance in Asia where the Nikkei continued its recent rally, up another 2% and back to levels last seen in February 1990 as the Japanese bubble was deflating.  However, Chinese shares remain under pressure with the Hang Seng (-0.6%) continuing its recent slide and mainland shares faring no better.  In Europe, the screens are a pale red, with losses on the order of -0.2% or so across the board and US futures are essentially unchanged at this hour (7:15).

In the bond market, 10-year Treasury yields have edged down 2bps this morning and are trading right on 4.00%.  European sovereign yields are little changed on the day.  After a bond sell-off (yield rally) for the past several weeks, it seems that a bit of dovish commentary from some ECB members, notably de Guindos and Centeno has calmed things down a bit.  And you will not be surprised that JGB yields have slipped another 1bp lower this morning as inflation concerns subside everywhere.

Oil prices are little changed today, holding onto yesterday’s gains but not really responding to a new wave of missile and drone attacks by the Houthis in the Red Sea against some tankers.  Too, gold prices are only edging a bit higher, 0.25%, and essentially have remained in a very narrow range for the past six weeks.  As to the base metals, copper has rallied nicely this morning, up 1% but aluminum is unchanged on the session.

Finally, the dollar is under modest pressure this morning against most currencies, but the yen is the exception, falling -0.4% with the dollar back above 145.00.  I believe you cannot separate the Nikkei rally from the yen decline and the ongoing interest rate story in Japan.  With softer inflation readings leading traders and investors to reduce the likelihood of any monetary policy change by the BOJ, those are exactly the moves that would be expected.  In the meantime, the market is staring to price in a slightly higher probability of a March rate cut by the Fed, up to 67.6% despite no indication from any Fed speaker that is on the table.  However, while this is the narrative, I expect the dollar will have a little trouble going forward against both G10 and EMG currencies.

There is no noteworthy economic data today, but we do hear from NY Fed President Williams at 3:15 this afternoon.  Yesterday’s comments by Michael Barr were interesting in that he was adamant that the BTFP (the lending facility put into place in the wake of last year’s Silicon Valley Bank collapse) was going to be wound down when its term of 1 year comes up in March.  Personally, I am skeptical that will be the case, but at the very least, we can expect it to make a quick appearance as soon as there is any other banking trouble.

And that’s really it for today.  Until tomorrow’s CPI, there is very little about which to get excited.  I don’t believe the Bitcoin story, while mildly interesting, is going to have any impact on other markets for any length of time.  So, we shall be biding our time for another twenty-four hours at least.

Good luck

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Much More Afraid

Posted on by 
Watanabe-san,
A previous Mr Yen,
“No intervention”

As USD/JPY approaches the psychological level of 150.00, there is a growing belief in the market that the BOJ is soon going to intervene.  Recall, last week we heard about the urgency with which the MOF is watching the exchange rate.  Historically, the next step would be for the BOJ to ‘check rates’.  This is when they call around to the big Tokyo bank FX trading desks and ask for levels.  The implication is they are ready to sell dollars and defend the yen.

However, unlike the previous decline in the yen almost exactly a year ago, the recent movement has been somewhat more gradual as can be seen in the chart below (source tradingeconomics.com)

This was highlighted last night by Hiroshi Watanabe, the deputy FinMin in charge of currency policy from 2004 through 2007.  He explained that after seeing the dollar remain in a 145-150 range for much of the past year, “I don’t think authorities are worried about the outlook as much as they were last year.  There’s no sense of imminence because the dollar/yen level hasn’t changed much from a year ago, and it doesn’t seem like the yen will start to plunge even if it breaches the 150 mark.”

As is often the case when it comes to concerns about a currency’s value, the pace of its decline is far more important than the actual level.  Most countries, or at least most finance ministries, feel they can handle slow and steady.  It is the abrupt collapses that scare them.  This move has been quite steady, and as long as both the Fed and BOJ maintain their current monetary policies, a continuation seems likely.  Hedgers, keep that in mind.

Now, turning to yesterday’s trade
A message was clearly conveyed
As interest rates rise
Risk appetite dies
And people are much more afraid

The most pressing story in markets continues to be the US Treasury market where sellers outnumber buyers on a daily basis.  Yields on the 10-year rose 10bps yesterday, touching 4.70% and are continuing higher by another 2bps so far this morning.  The bear steepener continues to be the story with the 2yr-10yr spread falling to -40bps and looking for all the world like it is going to go positive before the end of the year, if not the end of the month.  And it makes sense.  There is still substantial demand for short-term paper yielding more than 5% (yesterday’s 3mo T-Bill auction cleared at 5.35%).  Meanwhile, we are seeing money flee those assets with long duration over fears that inflation has not yet been quelled and that the structural issues (ongoing massive supply meeting limited demand) has investors pulling back quickly.  Not only are Treasury bonds being sold aggressively driving yields higher, but yesterday saw utility stocks, often seen as a duration proxy given the high amount of debt on their balance sheets, fall nearly 5%.  

This activity is having the knock-on effects that one would expect as well.  Yields around the world continue to get dragged higher by Treasuries, the dollar continues to benefit, and commodity prices are suffering.  In fact, yesterday saw a sharp decline in the price of oil and it has now retraced more than 6% from the peak last week.  I had written about the simultaneous rise in yields, the dollar and oil as being a HUGE problem for global markets.  Well, it seems that oil is starting to feel the pain of higher yields and a stronger dollar.  As well, tomorrow OPEC meets in Vienna and there is some talk that the Saudis may increase their production, unwinding those unilateral cuts made back in June and continued since then.   

But make no mistake, ongoing rises in Treasury yields will continue to underpin the dollar and that will be enough of a problem for economies elsewhere even if oil prices slide some more.  And right now, there is no indication things are going to change.  Yesterday we heard from two Fed speakers, Governor Bowman and Cleveland Fed President Mester with both maintaining the hawkish views.  In fact, Bowman expressed the need for several more rate hikes in order to get inflation under control and both were clear that higher for longer was crucial.  As long as that remains the Fed attitude, until we see a substantial change in the data stream, yields are going to continue to rise.

Now, this week brings the all-important NFP report on Friday, which has been a key driver of Fed policy.  With inflation readings continuing far above the Fed’s target, as long as NFP remains positive and the Unemployment Rate remains either side of 4%, the Fed will have no reason to reconsider the current policy mix.  In their minds, they have not yet broken anything, at least not so badly that it couldn’t be fixed.  I’m sure they are straining their arms as they pat themselves on the back for the effectiveness of the Bank Term Funding Program (BTFP) which was created after the bank failures in March.  In fairness, it seems to be working for now.  However, I will warn that cans can only be kicked down the road for so long, and I fear the end of that road is nearing.

As to the rest of the session today, risk is decidedly on the back foot.  Those equity markets in Asia that were open all fell pretty sharply with the Nikkei (-1.6%) and Hang Seng (-2.7%) leading the way lower.  The story is similar in Europe with the major indices all lower by about -0.75% or so as they respond to the ongoing increase in interest rates around the world.  Finally, US futures are lower by -0.45% at this hour (7:30) with concerns growing that yields will not stop rising.

Looking at European sovereign bonds, yields there are rising alongside Treasury yields with most of them higher by 3bps-4bps and Italy higher by 9bps.  That Bund-BTP spread, currently at 193bps, is something we need to watch as 200bps is likely to be the first place the ECB really shows concern and if it heads higher than that, expect more direct actions.  As to JGB yields, they remain static at 0.76%.

We already discussed oil prices and we are seeing serious weakness across the entire metals complex lately, although today’s declines are relatively muted, on the order of -0.2%, as the moves have already been pretty large.  The lesson from the recent price activity is that yields continue to drive the market.

Finally, the dollar remains king with the euro below 1.05, USDJPY just below 150 and the pound making a run at 1.20.  Last night, the RBA met and left rates on hold, as widely expected, but the tone of new governor Michele Bullock’s first meeting was seen as somewhat dovish leading to a nearly 1% decline in the Aussie.  At the same time, the EMG bloc of currencies is also coming under pressure with declines today on the order of -0.5% across all three regions.  There is a term, the dollar wrecking ball, which is quite apt.  As it continues to rise it puts intense pressure on countries around the world as they scramble to get dollars to service the trillions upon trillions of dollars of debt outstanding.  Nothing has changed my view that this has further to run.

On the data front today, the only release is JOLTS Job Openings (exp 8.8M) a number that remains significantly larger than the number of unemployed.  We also hear from Atlanta Fed president Bostic this morning so it will be interesting if he is willing to push back against the ongoing hawkishness.

I see no catalysts to change the current trend in the dollar, so for all you receivables hedgers out there, keep that in mind.

Good luck

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