The Boock Report

The echoes of 2008 continue with a weekend filled with worries about a bank failure and banks that can’t offload LBO bank loans. 

The importance of what Lael Brainard thinks is big as she’s not just Vice Chair but part of the Fed troika which also includes Powell and the NY president Williams. Reading again what she said on Friday tells me that she does not want another 75 bps rate hike in November. “It will take time for the full effect of tighter financial conditions to work through different sectors and to bring inflation down…We also recognize that risks may become more two sided at some point. Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle. Proceeding deliberately and in a data dependent manner will enable us to learn how economic activity and inflation are adjusting to the cumulative tightening and to update our assessments of the level of the policy rate that will need to be maintained for some time to bring inflation back to 2%.”

After rising by 9 bps on Friday, the 2 yr yield is down 9 bps today. John Williams, another member of the troika as stated, speaks this afternoon and again tomorrow. If he gives similar commentary, I believe 50 bps it will be next month. 

So the freak out over UK PM Liz Truss’ budget and tax cuts is calming as they decided to not go forward with the cut in the top rate to 40% from 45%. I say ‘freak out’ because it was complete nonsense and I couldn’t believe the level of criticism as it made no rational sense whatsoever. The UK economy is more than 3 Trillion pounds in size. The tax package was all of 40b pounds annually, just above 1% of GDP. The Biden student loan relief at $400b is about 1.6% of GDP for perspective. The $1.9 Trillion spent in March 2021 was about 7% of GDP. The pound is up for a 5^th straight day and gilt yields are lower. UK assets are dirt cheap for one that has a multi yr time horizon. 

As we are a week away from big bank earnings, a key thing to watch is what they plan on doing with bank deposit rates. Banks are losing deposits as people move money to much higher paying money markets. So, bank reserves at the Fed are falling rapidly and in turn, the money market funds are continuing to park money they are receiving at the Fed’s reverse repo facility which as of Friday hit a new daily high of $2.426 Trillion at a yield of 3.05%. As US bank reserves fall, it quickens the pace at which the Fed will end QT so as not to repeat the repo rate spike in 2019 that led to ‘not QE’ in Q4 then. Bank reserves parked at the Fed is down to $2.96 Trillion. That is 11% of GDP. The trigger in 2019 for the Fed to ramp up asset purchases was about 6.5% of GDP. To get to a similar percentage of GDP means that bank reserves have about $1.3T more to drop. 

There are also real world economic implications here because bank reserves are fuel for bank lending. Money parked at the Fed’s repo facility is just motionless money as it’s not recycled into the economy. 

US Bank Reserves parked at the Fed

Fed’s Reverse Repo Facility

Ahead of the US ISM at 10am est, here were the PMI’s seen overseas. They fell m/o/m in Japan, Australia, Taiwan, Vietnam, India, and Malaysia. They rose in Thailand, Indonesia and the Philippines.

Specifically on Taiwan because of their huge importance in the tech supply chain, S&P Global said “An accelerated decline in new orders, which was often linked to a deterioration in demand globally, drove a further substantial decline in production. As a result, firms cut back notably on purchasing activity, while de stocking activities intensified, with firms reducing their holdings of pre- and post-production goods at the quickest rates in over a decade.” Also, “Companies do not anticipate the situation to improve anytime soon, with business confidence regarding the yr ahead hitting its 2^nd lowest level on record. This was driven by fears that global economic conditions will weaken further, and demand across key markets across Asia, Europe and the US will continue to decline in the months ahead.” 

Japan also reported its quarterly Tankan report for Q3. The large company mfr’g index fell to 8 from 9. The estimate was 10. The services component though did rise 1 pt q/o/q. That same mix was seen for smaller companies where mfr’g was in contraction while services improved. The end of covid restrictions helps to explain as tourism is picking up in Japan. 

The yen is busting thru 145 and this triggered another threat from the Japanese Finance Minister Suzuki who said “If we see excessively one-sided moves or something similar, we will take bold action as needed. That thinking hasn’t changed.” Well, that first round of intervention has failed and will continue to unless Kuroda changes his stance on YCC. 

The September Eurozone mfr’g PMI was revised down a hair to 48.4 from 48.5 initially and that is down from 49.6 in August. It’s now down for the 8^th straight month with the war in Ukraine starting the downward spiral. S&P Global said “Excluding the initial pandemic lockdowns, eurozone manufacturers have not seen a collapse of demand and production on this scale since the height of the global financial crisis in early 2009. The downturn is being driven primarily by the surging cost of living, which is reducing spending power and hitting demand, but soaring energy prices are also increasingly limiting production at energy intensive manufacturers. Worse looks set to come, with orders slumping at a significantly steeper rate than production is being cut.” All nothing we don’t already know but the reality still bites. 

The UK mfr’g PMI was also revised down by .1 pt to 48.4 but that is up from 47.3 in August and vs 52.1 in July. The same challenges stated above are clear here too. 

Lastly, we saw market sentiment was pretty sour last week in the II, AAII and CNN data. Over the weekend in Barron’s I saw that the Citi Panic/Euphoria index is in ‘Panic’ level for the 2^nd week. From strictly a contrarian set up, the current mood is the basis for a bounce. Anything below -.17 is considered ‘Panic.’