If It Pleases The Court, Jerome Powell Would Rather Congress Didn’t Ask Him About The Trade War

By Heisenberg Report

Jerome Powell is on Capitol Hill on Tuesday (it’s Humphrey Hawkins week, in case you forgot),  and his testimony will be scrutinized heavily in light of the trade frictions and the prospect that a trade-related downturn in global growth could spill over and put the brakes on U.S. economic momentum.

Last week, in an interview with American Public Media’s “Marketplace” program, Powell was non-committal on the trade issue, but his comments in Sintra as well as the June Fed minutes reflect some consternation about the balance of risks.

Generally speaking, his assessment of the economy will be characteristically upbeat, but as BofAML notes, “the more interesting take may come from his assessment on the risk to the economy, especially around tariffs.”

Continue reading If It Pleases The Court, Jerome Powell Would Rather Congress Didn’t Ask Him About The Trade War

A Look at SOMA Changes Influence on SPX Since Quantitative Tightening Began

By Rob Hanna

The chart below is from this weekend’s QE subscriber letter. It is one I have updated frequently the last few months. It looks at compound performance of two opposing strategies. The blue line represents a strategy that is invested in the market during weeks that the Fed’s SOMA account value rises. During weeks where the SOMA declines, the blue line is sidelined (earning no interest). The red line takes the opposite approach. It is in the SPX during SOMA contraction weeks, and it is sidelined when the SOMA expands. (The SOMA is the Fed’s System Open Market Account that contains all of its bond holdings.) SOMA changes are released each Thursday, and look at a Thursday – Wednesday reporting week.


Continue reading A Look at SOMA Changes Influence on SPX Since Quantitative Tightening Began

Why The Fed Will Be Forced To Halt QT Early And Expand The Balance Sheet In 2020, According To Morgan Stanley

By Heisenberg

The longer the current U.S. expansion drags on, and the more unapologetic Jerome Powell’s Fed comes across, the more obsessed the market becomes with curve inversion.

And when I say “curve inversion”, I mean “pick a curve, any curve.” Swaps, corporates or the old standbys in the Treasury complex. It all works if you’re running down stories. Anything to put the word “inverted” next to the word “curve” in a headline. “It’s provocative. It gets the people goin’!


On Thursday, Morgan Stanley is out with an expansive new note that flags mid-2019 for inversion. To wit:

Continue reading Why The Fed Will Be Forced To Halt QT Early And Expand The Balance Sheet In 2020, According To Morgan Stanley

Mark It On Your Calendars

By Kevin Muir

It’s that time again. At the end of this month, the Federal Reserve has over $30 billion of notes maturing. I won’t rehash what this might mean for the market, rather for those not familiar, I ask you to go read Pink Tickets On QT Days.

Let’s do a quick recap at what happened at the previous big QT day – last month end – May 31st, 2018:

Another large QT maturity day, and another down day in spooz.

Let’s update the table with the recent QT maturity days to have a peek at what it looks like now:

Continue reading Mark It On Your Calendars

Atlanta Fed: Q2 GDP Forecast Upgraded To 4.7%!

By Anthony B. Sanders

Is The Fed Going To Take Us Higher?

The Atlanta’s Fed’s GDP tracker has upgraded Q2 GDP to … 4.7%!

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2018 is 4.7 percent on June 19, down from 4.8 percent on June 14. The nowcast of second-quarter real GDP growth decreased 0.2 percentage points after the Federal Reserve Board’s industrial production release on Friday, June 15, as a decline in the nowcast of real gross private domestic investment growth from 10.9 percent to 9.2 percent more than offset a slight increase in the nowcast of real consumer spending growth from 3.6 percent to 3.7 percent. After this morning’s new residential construction release from the U.S. Census Bureau, the nowcast of second-quarter real residential investment growth increased from 0.3 percent to 2.9 percent.


This likely means that The Fed will want to take us higher … in terms of interest rates.

Fed Chair Jerome Powell: “Boom shaka-laka-laka Boom shaka-laka-laka.”


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Financial Economy is Different Than the Real Economy

By Kevin Muir

First up – sorry for the lack of posts recently. I have some excuses, but they aren’t good ones, so I will spare you the details.

Even though lately I haven’t been following the markets as much as I would like, I can’t help but chirp in regarding market action.

Recently, it has become popular to believe the Fed has hiked into the next recession. I am seeing this idea repeated throughout my ‘fast money’ crowd feed.

Last week, Alex Gurevich tweeted a comment, that on top of being rather witty, also perfectly epitomizes this thinking.

Now I doubt Alex thinks the last rate hike is behind us – after all, the front end of the curve has at least a couple of hikes priced in between now and year-end. Yet, more and more market participants are discounting the Fed moving to neutral much sooner than was previously the case.

Continue reading Financial Economy is Different Than the Real Economy

A Real Concern About Over(h)eating

By Michael Ashton

I misread a headline the other day, and it actually caused a market analogy to occur to me. The headling was “Powell Downplays Concern About Overheating,” but I read it as “Powell Downplays Concern About Overeating.” Which I was most delighted to hear; although I don’t normally rely on Fed Chairman for dietary advice[1] I was happy to entertain any advice that would admit me a second slice of pie.

Unfortunately, he was referring to the notion that the economy “has changed in many ways over the past 50 years,” and in fact might no longer be vulnerable to rapidly rising price pressures because, as Bloomberg summarized it, “The workforce is better educated and inflation expectations more firmly anchored.” (I don’t really see how an educated workforce, or consumers who have forgotten about inflation, immunizes the economy from the problem of too much money chasing too few goods, but then I don’t hang out with PhDs…if I can avoid it.) Come to think of it, perhaps the Chairman ought to stick to dietary advice after all.

But it was too late for me to stop thinking about the analogy, which diverges from what Powell was actually talking about. Here we go:

When a person eats, and especially if he eats too much, then he needs to wait and digest before tackling the next course. This is why we take a break at Thanksgiving between the main meal and dessert. If, instead, you are already full and you continue to eat then the result is predictable: you will puke. I wonder if it’s the same with risk: some risk is okay, and you can take on more risk up to a point. But if you keep taking on risk, eventually you puke. In investing/trading terms, you rapidly exit when a small setback hits you, because you’ve got more risk on than you can handle. Believe me: been there, done that. At the dinner table and in markets.

Continue reading A Real Concern About Over(h)eating

Treasury 10Y-2Y Slope Flattens To 35.5 BPS…

By Anthony B. Sanders

…Eurodollar 3M Futures Spread Falls To Lowest Level Since 2000 (Europe’s Troubles In One Chart)

The US Treasury 10Y-2Y slope keeps falling … as The Fed keeps raising their target rate. It has flattened to 35.5 basis points.


Meanwhile, the 3 month Eurodollar spread to  the lowest level since 2000.

Continue reading Treasury 10Y-2Y Slope Flattens To 35.5 BPS…

What Wall Street Expects From the Fed

By Heisenberg

Well, it’s Fed day and obviously everyone will be kind of frozen in time in the lead up to the decision and the post-meeting presser where Jerome Powell will probably prove (again) that he prefers to answer questions in a more direct, less academic fashion than Janet Yellen.

I continue to maintain that’s not a positive development, because it leaves less room for obfuscation and paradoxically, academic obfuscation (i.e., model-based bullshitting) is a highly effective way of letting markets know that the committee is willing and able to conjure up excuses to remain dovish even when the data suggests a different path in the event risk assets are showing signs of cracking. And I know what you’re thinking: “The Fed shouldn’t be concerned about propping up risk assets at every press conference meeting!” Yeah, ok man. Just remember you said that when, sometime down the road, Powell accidentally triggers an afternoon rout by eschewing long-winded rambling for a straightforward answer.

Powell of course hasn’t adopted anything that approximates the approach Kevin Warsh might have preferred, but obviously there’s a perception that he (Powell) is more data-dependent than Yellen and that it will take more in the way of turmoil in emerging markets and much more in the way of exogenous shocks and event risk from things that aren’t directly related to Fed policy (e.g., Italy) to deter him.

On Tuesday, WSJ moved markets with a report that once again suggested Jerome Powell may be moving towards holding a press conference after every meeting, which would effectively mean that every meeting is live. That got a reaction across fed funds futures and pushed the dollar higher. A move to take questions after each meeting could potentially set the stage for more volatility – or at least that’s the way I would see that panning out, even though I’m sure that wouldn’t be the intent and I’m sure a lot of folks wouldn’t agree with me.

Continue reading What Wall Street Expects From the Fed

The Glacial Taper Continues!

By Anthony B. Sanders

Fed’s Treasury Note and Bonds Holdings Back To April ’14 Levels While Agency MBS Holdings Back To August ’15 Levels

It took the Fed five-and-a-half years to amass $3.4 trillion in Treasury securities and mortgage-backed securities (MBS) during Quantitative Easing (QE). The Fed is now reversing that process, including the opposite of “tapering,” as it is “ramping up” its QE unwind. Call it “the glacial tapering.”

The Fed’s balance sheet for the week ending June 6, released Thursday afternoon, shows a total drop of $141 billion since October, the beginning of the era officially called “balance sheet normalization.” At $4,319 billion, total assets have dropped to the lowest level since May 7, 2014, during the middle of the “taper.”

If the Fed continues to follow its plan, it will shed up to $420 billion in securities this year, and up to $600 billion a year in 2019 and each year in the future, until it considers its balance sheet to be “normalized” — or until something big breaks. For May, the plan calls for the Fed to shed up to $18 billion in Treasuries and up to $12 billion in MBS.

On the Treasury note and bond side, we are back to April  2014 levels.


On the agency MBS side, The Fed’s holdings are also dropping and are back to August 2015 levels. But they are not declining that rapidly.

Continue reading The Glacial Taper Continues!

Another Confesses The Impossible, We Might Not Have Known What We Were Doing

By Jeffrey Snider

When you go around claiming that central bankers don’t know the first thing about money, people tend to think you are crazy. It’s not really their (people’s) fault. Not only have we been conditioned to believe in a technocracy of sorts, it is raw human nature to immediately suspect such a radically contrarian view.

It would be one thing to say, well, central banks screwed up and were behind, making a few big mistakes along the way and we had the pay the price for it. Even that would be hard for some to really accept. But to make the indictment that they really don’t know what they are doing even on the most fundamental level just cuts way too deeply against convention. Your natural instinct is to believe there is no way that could possibly be true.

The Maestro, after all.

Yet, if you actually take the time to listen to what they say, and have said in the past, they do admit as much. It’s never summarized in that fashion, of course, and any potentially negative implications are downplayed or dismissed.

Since the Great Inflation monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the sixties), so Economists just gave up trying. This is no small thing, but in Economics it is treated trivially.

Continue reading Another Confesses The Impossible, We Might Not Have Known What We Were Doing

Pink Tickets on QT Days

By Kevin Muir

I know I have told this story before, but it bears repeating. Way back in 2011 I was watching the S&P like a hawk. Trading each squiggle, I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.

But on some days, the stock market would get mysteriously strong. It would usually occur mid-morning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden – out of the blue – stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.

It took me a while, but eventually, I figured it out.

Although it flies directly in the face of Dr. Malkiel’s Random Walk Down Wall Street, the days when the Fed expanded their balance sheet through bond purchases resulted in outsized stock market gains. These bond buys were conducted through Permanent-Open-Market-Operations (POMO) and the great thing about a transparent Federal Reserve is that they listed the schedule in advance, so it was easy to measure the relationship between POMO operations and stock market performance.

Continue reading Pink Tickets on QT Days