Financial Turbulence Ahead?
January 8, 2024
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–Once again, a couple of summary points from Lorie Logan, Dallas Fed President.
First, noting that financial conditions (long end rates) eased significantly since October, the Fed may have to hike FFs.
Some model-based term premium estimates remain higher than levels seen last summer, but I’m mindful that all else equal, a lower term premium leaves more work to be done with the fed funds target.
Second, some pressures in repo are normal:
The emergence of typical month-end pressures suggests we’re no longer in a regime where liquidity is super abundant and always in excess supply for everyone. In the aggregate, though, as rate conditions demonstrate, the financial system almost certainly still has more than ample bank reserves and more than ample liquidity overall.
Third, the Fed is going to slow, and likely end QT:
So, given the rapid decline of the ON RRP, I think it’s appropriate to consider the parameters that will guide a decision to slow the runoff of our assets. In my view, we should slow the pace of runoff as ON RRP balances approach a low level.
–Friday’s headline Employment number was solid, with NFP 216k and a rate of 3.7%. However, some of the internals were apparently weak. In stark opposition to NFP, the employment component of Service ISM was just 43.3, the lowest since Covid, and 5 points lower than any reading since 2021. In any case, tens closed back above 4%, up 5.1 bps to 4.042%, and thirties ended at 4.20%. Auctions will be a test this week, 3s, 10s and 30s, Tues, Wed, Thurs.
Like a lot of stocks, Boeing had a spectacular run, jumping over 50% from the late Oct low of 176 to the Dec high 267. With aircraft problems seen over the weekend, pre-market it’s around the 38% retrace, which is 232. JPM had a similar, though smaller magnitude, straight up run since end of October, +28% from 135 to last week’s high 173. Possible that we’ll see financial market turbulence affecting the big banks/XLF?
