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Morning Commentary

WON'T HE DO IT?

By Charles Payne, CEO & Principal Analyst
9/18/2019 9:31 AM

 

Federal Reserve Bank of New York

OPERATING POLICY

Statement Regarding Repurchase Operation

September 17, 2019

In accordance with the FOMC Directive issued July 31, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 9:30 AM ET to 9:45 AM ET today, September 17, 2019, in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent.

This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type and are subject to a minimum bid rate of 2.10 percent.

I wouldn’t call yesterday’s session a nail-biter, but the entire session had an anxious feeling as investors braced for the conclusion of the Federal Open Market Committee (FOMC) and the subsequent question-and-answer period. Meanwhile, the experts were whistling past the graveyard, ignoring the fact that the Federal Reserve had to inject cash into the repo market for the first time in a decade.

You may remember on September 11, 2008, when Tim Geithner told Hank Paulson of Lehman Brothers that he needed $230 billion to support their repo program and to keep trades afloat. Since then, the Fed has printed so much cash that the last thing anyone would expect is that the trading system could run dry. 

The Fed’s balance sheet swelled to $4.52 trillion by January 2015, and most recently, $4.44 trillion in January 2018. Now, the balance sheet is only $3.77 trillion.

As for cash in circulation, $1.7 trillion U.S. dollars are floating around in the system. 

FRED Graph

Nothing to See Here, Folks

The Fed intervention in the repo market was somewhat commonplace before the Great Recession. The market meltdown and seasoned investing expert’s kind of yawned. This was just a unique series of events and nothing to be alarmed about.

When the “experts” say ‘be cool, all is well,’ I tend to worry a little more. 

There will be more intervention this morning, so we’ll see just how cool we should be. On that note, you have to wonder if folks at the Federal Reserve were as cool as Wall Street mavens. There has been a lot of anxiety at the Fed for some time about the institution’s ability to control short-term rates.

Yesterday, the effective fed funds rate rocketed to the higher end of the 2.25% rate, overnight general collateral repurchase agreements climbed almost 600 basis points (bps) to 8.75% and then settled at 7.25%. The New York Fed came to the rescue. It looked as though the kerfuffle was over until late in the session when the issue was raised again.

As it turns out, the NY Fed injected $53 billion into the repo market yesterday and $75 billion this morning.   At the very least, these actions are a proxy on the Fed and further chip away at credibility.

What’s Up, Player?

All day long, wearing a mask of false bravado

Trying to keep up the smile that hides a tear

But as the sun goes down, I get that empty feeling again

How I wish to God that you were here

Baby come back, any kind of fool could see

There was something in everything about you

Baby come back, you can blame it all on me

I was wrong, and I just can't live without you

-Player

Late into yesterday’s session, DoubleLine Capital founder Jeffrey Gundlach made comments to Reuters that the episode made it more than likely the Fed would start to repurchase assets “pretty soon.” That put a spark into the market, which saw all the major indices close at the highs of the session.

His comments and observation mean Jay Powell & Co could be singing “Baby Come Back” to Quantitative Easing (QE), as they turn the money printing machine back on. The speculation sent stocks higher as 9 out of 11 sectors finished higher.

S&P 500 Index

+0.26%

 

Communication Services (XLC)

+0.10%

 

Consumer Discretionary (XLY)

+0.61%

 

Consumer Staples (XLP)

+0.55%

 

Energy (XLE)

 

-1.39%

Financials (XLF)

+0.11%

 

Health Care (XLV)

+0.15%

 

Industrials (XLI)

 

-0.05%

Materials (XLB)

+0.81%

 

Real Estate (XLRE)

+1.41%

 

Technology (XLK)

+0.41%

 

Utilities (XLU)

+0.87%

 

How Big Is the Cut?

That kind of speculation also has many wondering if the Fed could go as deep as a 50-basis point cut today. Heading into the FOMC gathering, the Street was sure of two more rate cuts this year with a chance of a third one.

Wall Street Consensus

Fed Rate Range

Consensus

2.00 to 2.25

3%

1.75 to 2.00

31%

1.50 to 1.675

46%

1.25 to 1.50

19%

The plot thickens.

Portfolio Approach

Communication Services

Consumer Discretionary

Consumer Staples

1

2

1

Energy

Financials

Healthcare

1

1

2

Industrial

Materials

Real Estate

3

2

1

Technology

Utilities

Cash

3

0

3

 

Today’s Session

Equity futures have been flat all morning long, as investors wait and wait for the Fed as anxiety and string of strong economic data has lifted the chance of no hike to north of 40%.

This could provide cover for the Fed to cut but maintain its “mid-cycle adjustment” stance, which roiled the market last time around.  At this point, a cut, along with a greater focus on maintaining the economic expansion and being open to data would be the right combination for the market. 

I hope Powell has learned the lesson that not only does loose lips sink ships, it also sinks markets.

Housing Rebound

This morning there was great news across the housing spectrum with housing starts and permits blowing away estimates and purchase applications surging as well.

Consensus on starts was +4.1% versus actual +12.3%.

Housing Starts

Annualized rate

Total

M/M

Y/Y

Single Family

919,000

+4.4%

+3.4%

Multi-family

445.000

+30.9%

+13.7%

Total

1,364,000

+12.3%

+6.6%

 

Starts

United States Housing Starts

Permits came in at an annualized rate of 1.42 million against consensus of 1.30 million.

Housing Permits

Annualized rate

Total

M/M

Y/Y

Single Family

866,000

+4.5%

+4.5%

Multi-family

553,000

+14.9%

+27.3%

Total

1,419,000

+7.7%

+12.0%

 

Permits

United States Building Permits

 


 

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