The Boock Report

Gilt yields are falling sharply again as the new Chancellor of the Exchequer outlines his new plan today which is basically just a backtrack of the old one. If one of the sacrifices is that the corporate income tax rate will rise to 25% next yr from 19%, I’d like to hear why that’s a good idea. The 10 yr yield is down by 35 bps to just under 4% at 3.99%, a two week low. The 30 yr yield is down by 38 bps to 4.41%, back to where it was on Oct 7th. The pounds is stronger, as are most currencies against the US dollar today, as the BoE confirmed that bond purchases have ended and they said they will resume the sale of corporate bonds next week that they hold. They will do this via auction and will list the bonds for sale this Friday. Also, on the sign that just maybe the pension fund LDI situation has been derisked, European bonds across the board are rallying and in turn lifting US Treasuries. 

I do though need to point out that in Japan, the 40 yr JGB yield hit a fresh 8 yr high overnight at 1.74%. How the BoJ handles things from here is still a story that needs to be told and the yen is one of the few currencies weaker against the dollar today. 

40 yr JGB Yield

I looked thru some of the earnings transcripts of the big banks to see what they said about the deposit situation I’ve been highlighting. JPM said “with spending growth faster than income, we are seeing a continued decrease in median deposits year on year, particularly in the lower income segment. And not surprisingly, small business owners are increasingly focused on the risks and the economic outlook.” Wells Fargo said “Average deposits declined 3% from both the year ago and the second quarter, with declines across our deposit gathering businesses. Compared with the second quarter, Wealth and Investment Management had the largest decline by dollar amount as clients looked for higher-yielding alternatives. Declines in our commercial businesses were driven mostly by outflows of non-operational deposits, which can be more price sensitive and are a less stable source of funding.” Citi said “And average deposits were down approximately 2%, largely driven by declines in legacy franchises and the impact of FX translation, partially offset by the issuance of institutional CDs as we continue to diversify the funding profile of the bank.” 

I did not see any comments on how banks plan to raise the rates they will pay on deposits (likely for competitive purposes) in order to better compete with money market funds. Maybe for now they don’t mind losing some deposits as they got so many over the past few years but I’m bringing this all up because it is a direct influence on the bank reserves held at the Fed and in turn QT and also will impact bank lending. Over the past year, bank reserves held at the Fed have fallen by $1.1 Trillion and $700b of it just from March when the Fed started hiking rates and ended QE. If the drop continues at this pace, it will be unlikely the Fed is able to get away with as much QT as they hope. 

Bank Reserves held at the Fed

Reflecting the continued global slowdown, particularly with the purchases of goods, Singapore said its non-oil exports in September fell by 4% m/o/m, well worse than the forecast of up .4%. They are still up 3.1% y/o/y but down from 11.4% higher seen in August. Electronic exports in particular dropped by 10.6% y/o/y. Geographically, exports to China plunged by 34% y/o/y. Asian stock markets were mixed overnight and the Straits index weaker by .8% but is down just 3.5% ytd.