In today’s briefing:
- Steno Signals #74 – Did King USD Just Break?
- Fed’s Policy Rate Benchmark Under Scrutiny: Goodbye to the Federal Funds Rate?
- How Far Can This Rally Run?
- Assessing Economic Risk Through the Biden-Xi Meeting Lens
Steno Signals #74 – Did King USD Just Break?
- The sharp move in USDJPY and other USD pairs towards the end of last week has caught our attention and it arrives on the back of Powell letting go of the steering wheel on USD real rates.
- The weekly credit data from the US economy keeps weakening and we are en route for a credit contraction in the US during Q1/Q2 next year.
- Powell is probably right to let go of the tightness in USD real rates, but the question is whether he could be tempted to take back control in December in a final policy error?
Fed’s Policy Rate Benchmark Under Scrutiny: Goodbye to the Federal Funds Rate?
- The poor results from the US Treasury’s latest 30-year bond auction highlights limited private investor appetite. Pressure on the Treasury to persist with high levels of short-term borrowing has increased.
- Aggressive quantitative easing and interest on reserves have significantly lowered trading in the federal funds market by US banks, while Federal Home Loan Banks currently dominate lending.
- The Fed’s policy rate could shift to the Secured Overnight Funding Rate. Functionality could be impacted by shifting perceptions about the collateral quality of Treasury securities due to high borrowing.
How Far Can This Rally Run?
- The U.S. equity rally off the bottom in late October is characterized by strong price momentum and shows a high degree of upside potential.
- Point and figure charting signifies measured objectives indicating percentage gains in the high teens or low 20s.
- We also offer a series of sell signal triggers that indicate possible inflection points in risk/reward potential.
Assessing Economic Risk Through the Biden-Xi Meeting Lens
- The Biden-Xi meeting in San Francisco exposed the growth risks and vulnerabilities of each country’s economy.
- The recent bond market rally and falling oil prices could be a signal of a growth slump.
- A review of the U.S. and Chinese economies shows that slowdown risks are low. Consequently, investors should embrace the recent risk-on tone in the markets.
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