• GB Davis

Market Insight: Where We at MacroWorld?

Some interesting data this week. First, Tuesday's Capacity Utilization (which we highlighted in our Week Ahead posting last week) was pause concern, taking a chunk out of the NY Fed's 2Q19e USGDP Nowcast (0.14 to be more precise). Industrial production chopped another 0.09 off 2Q19e, and on the week 2Q19e fell from 2.04% to 1.92%. At the same time, ECRI's Weekly US FWD GDP increased again, now breaching 1.0 and continues a slow upward movement and trend. Our view on the next Fed move is the potential announcement of a UST band for its new Fed Repo facility expanding and contracting at each policy meeting within such band (perhaps even having the ability to do so more broadly and timely expand such in the event of extraordinary market risk off and flight to UST) the range of Excess Reserves set to 'firm' this September with the end of QT. For example, we currently see a 50-50 chance of a rate cut in 1Q20 - while at the same time the employment market is strong, inflation (by Fed measures, e.g PCE) remains constrained (even under where parties would like to see inflation, and willing overshoot), and the Fed could chose to lubricate (like oil in an engine) the economy with incremental QE to expand the Fed Repo facility (as dubbed recently by St. Louis Fed in reference to the standing level of Excess Reserves). In the event of a pension crisis (which will happen at some point), the Fed could even use this new facility to expand collateral purchases to muni bonds. Look, seen Greece and Italian bond yields relative to USTs? why? ECB and IMF backstops; fundamentally though doesn't make too much sense. We live, now, in a world of relative valuations and not absolute valuations (this is why Shiller was so wrong on asset pricing with a backward looking 10yr regression that does not factor the shadow rate, and does not factor dynamically a lower and lower lower bound on Fed Funds and risk-free rates). Here's the real shocker though: if the Fed is to announce a band around a stable level of Excess Reserves, and the ability to push-and-pull on such facility - guess what? Donald Trump will be correct, in part, in his call for more QE - but from a layperson's perspective, but still, he'll still take public credit for such. #NotInvestmentAdvice

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