Earning seasons is upon us. They continue to beat expectations. I think this will continue for 2019.
Emerging markets have been neglected for years. They are about to play catch up.
The Fed is giving hints that it is just about done tightening. These signals have not yet translated into action. The balance sheet keeps shrinking.
I think the fear that central bankers would keep tightening has been misplaced. However, until their words translate into action, I remain cautious.
As a side note about the Feds operation, I noticed that the federal funds rate went above the IOER (Interest on Excess Reserves).
This is not supposed to happen and may indicate banks are going into the federal funds market to maintain their reserve requirements. This article gives a detailed analysis.
Bank of America’s Mark Cabana indicates this is due to money market fund outflows around the April tax date and elevated general collateral repo rates.
Barclay’s Joseph Abate said, “[this] suggests that moments of upward pressure on the rate will become more frequent as bank reserves drop, and changes in the level of reserves now have larger effects on the Fed’s policy target.”
I am not reading to much into this yet. The spread would have to be a lot larger and last a lot longer.
Here is the one paragraph history lesson on IOER. It was created during the last recession. The Federal Reserves states it is ‘an additional policy tool for the Fed’.
Excess reserves are monies that are not in the system so to speak. This money is not bidding up goods and services in the economy. Most of the money the Federal Reserve created in 2008 winded up parked right back at the Fed. In order to have some control over the outflows of this money into the economy, the Federal Reserve created IOER. The FOMC is very much aware of all of this. They make statements about it on a regular basis.
The massive drop in excess reserves over the past few years has not reflected anything strange or abnormal in the money supply numbers or credit. This is not what I would have expected. With the Federal Reserve running off its balance sheet and excess reserves leaking out, it is very difficult to predict how this will all play out. As of right now, there is nothing I see that suggest a recession is on the horizon.