16.01.2024 – If some augurs are right, then the market will soon be flooded with fresh money again. In other words, the Federal Reserve’s quantitative tightening is apparently about to come to an end. At the very least, it is likely to be slowed down. The reason is apparently liquidity problems in the interbank market.
The Federal Reserve’s presumed about-turn could give the market a new boost. This is because a large wave of money is likely to flow back into Wall Street and the real economy. That would be the consequences: Equities long, dollar short, precious metals long, just like other commodities. The picture shows an example of the daily chart of the S&P 500.
Source: Bernstein Bank GmbH
This is the background: The brilliant financial blog “ZeroHedge” once again referred to a development that is said to have started back in December. According to the blog, the interbank market is the canary that has just tipped off the perch – the SOFR (Secured Overnight Financing Rate) reached its highest level since the repo crisis in March 2020 weeks ago. In other words, banks urgently need fresh money and are therefore prepared to pay higher interest rates in overnight lending. The Fed’s quantitative tightening has dried up the available liquidity, as Lorie Logan, head of the Dallas Fed, also recently stated.
Signals from WSJ and JPM
And now the mouthpiece of Fed Chairman Jerome Powell has also spoken out. Nick Timiraos from the “Wall Street Journal” confirmed that QT will be curbed: “Fed officials are to start deliberations on slowing, though not ending, that so-called quantitative tightening as soon as their policy meeting this month. It could have important implications for financial markets.”
As luck would have it, JP Morgan made a similar judgement: “We now expect that the FOMC will have the outline of a timeline at the January meeting, communicated mid-February minutes to that meeting. We expect that this plan will be formally agreed to at the mid-March meeting and will be implemented beginning in April.” In other words, the previous monthly reduction in available Treasuries will be lowered from USD 60 billion to USD 30 billion from this date at the latest – in the course of tightening, the Fed has allowed bonds and mortgages to expire without replacing them with new ones.
Our conclusion: If the tightening is reduced, the bulls can rejoice. Especially as interest rate cuts are also possible. However, there is one important caveat: if investors start to worry that any major banks are reeling, things will get uncomfortable. Much will depend on the Fed’s wording, i.e. the justification for the renewed increase in liquidity. We look forward to seeing what happens next and will keep you up to date!
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