The New York Fed on Friday published an important statement that said:
“The Federal Reserve Bank of New York will conduct a series of overnight and term repurchase agreement (repo) operations to help maintain the federal funds rate within the target range that currently stands at 2.00 – 2.25 percent.
The Desk will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each:
- The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, from Monday, September 23 until Thursday, October 10.
- After October 10, 2019, the Desk will conduct operations as necessary to help maintain the federal funds rate in the target range, the amounts and timing of which have not yet been determined.
- For today, Monday, September 23, the Desk will conduct an overnight repo operation for an aggregate amount of up to $75 billion."
The fed funds rate target range are key interest rates with which the Federal Reserve aims to influence to control monetary policy and last week these rates spied up to 10 percent, which is far above the top-end of the Fed’s target range for the first time since the global credit crisis more than a decade ago.
So far, the Fed’s intervention works, Reuters explained. The overnight repurchase agreement (repo) rate was last Thursday at 1.85 - 1.95 percent, compared with 1.90 - 2.00 percent before the latest repo operation.
The dollar liquidity problem seems, at least for now, to be resolved and therefore it will be interesting to see what occurs on October 8 - 10 when the current operations expire that include the 14-day term operations and the end-of-month/end-of-quarter operations which are expected to pass without problems.
Investors could do well keeping in mind that besides the Fed’s latest intervention decision, the U.S. Treasury has still scheduled to sterilize about $100 billion before year-end, which will of course will not help the dollar scarcity, the system faces. Let’s also keep in mind that the ‘foreign’ repo pool has also removed about $70 billion of liquidity over the past 12 months.
Therefore, it cannot be excluded that the Fed could start to buy ‘again’ about $10 to $15 billion monthly and that could be decided on the next FOMC meeting on October 29 – 30, which would in fact be another, albeit light, QE (Quantitative Easing) operation that should be slightly dollar negative and equities positive.
Besides all that, today we got a whole series of PMIs of which the German Flash Composite PMI for September came in at the lowest level since October 2012.
The key findings are:
- Flash Germany PMI Composite Output Index at 49.1 (August: 51.7) an 83-month low.
- Flash Germany Services PMI Activity Index at 52.5 (August: 54.8) a 9-month low.
- Flash Germany Manufacturing PMI at 41.4 (August: 43.5) a 123-month low.
- Flash Germany Manufacturing Output Index at 42.7 (August: 45.8) an 86-month low.
The German manufacturing numbers are simply awful. All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009. With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth.
As Germany is the world’s fourth economy and these awful numbers represent a serious negative drag on the world economy.
The U.S. Flash Composite PMI for September came in ‘slightly’ higher than in August.
The key findings are:
- Flash U.S. Composite Output Index at 51.0 (50.7 in August) a 2-month high.
- Flash U.S. Services Business Activity Index at 50.9 (50.7 in August) a 2-month high.
- Flash U.S. Manufacturing PMI at 51.0 (50.3 in August) a 5-month high.
- Flash U.S. Manufacturing Output Index at 51.7 (50.8 in August) a 5-month high.
The survey indicates that businesses continue to struggle against the headwinds of trade worries and elevated uncertainty about the outlook. At current levels, the survey employment index is indicative of non-farm payroll growth falling below 100,000. Price pressures have meanwhile also eased, with both input costs and average selling prices for goods and services dropping again in September. Inflows of new service sector business almost stalled in September.
In short, the U.S. remains still the best place to invest while the big question becomes now: “Will the U.S. be able to withstand the global slowdown?”
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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